Baran

6、For a 20-year, $1,000 par value, 6 percent coupon T-bond yielding 5 percent, the dollar value of a basis point (DV01) and associated percentage price change (PPC) are closest to:

A) $1.37 and 0.12%.
 
B) $0.14 and 0.01%.
 
C) $0.57 and 0.06%.
 
D) $2.45 and 0.20%.

Baran

The correct answer is A

N=20×2; I/Y=5/2; PMT=60/2; FV=1000; CPT→PV=1,125.51=V0
N=20×2; I/Y=4.99/2; PMT=60/2; FV=1000; CPT→PV=1,126.88=V-
DV01=1,126.88-1,125.51=$1.37. PPC=DV01/V0=1.37/1,125.51=0.0012.

Baran

 

7、June Klein, CFA, manages a $200 million (market value) U.S. government bond portfolio for a large institution. Klein anticipates a small, parallel shift in the yield curve of 10 basis points and wants to fully hedge the portfolio against any such change. Klein would like to use the T-bond futures contract to implement the hedge. She tabulates some essential information about her portfolio and the corresponding futures contract. The results are shown in Table 1.

Table 1: Portfolio and Treasury Bond Futures Contract Characteristics

Value of Portfolio:	$100,000,000
Duration of Portfolio:	8.88438
Mar-00 Futures:	94.15625
Settlement Date:	02/17/00
Final Delivery Date:	03/31/00
First Delivery Date:	03/01/00

Klein is not as comfortable with the T-bond futures contract as she would like to be. Consequently, she decides to familiarize herself with the characteristics of the futures contract and its associated delivery process. She collects all of the deliverable bonds for the futures contract. This information is shown in Table 2. Klein will test her understanding using the highlighted bond in Table 2. The price value of a basis point (PVBP) are per $1 million par value.

Table 2: Treasury Bonds Deliverable for T-Bond Futures Contract

Coupon	Maturity or first call date	Price (flat)	Accrued interest	YTM/YTC	PVBP $ per million par	Duration	Conversion factor	Cost of delivery
10.000%	11/15/15	133 24/32	2.5824	6.534%	1211.2284		1.1759	23.0331

Klein's broker supplies the characteristics of the Treasury bond that is currently the cheapest-to-deliver bond. These are shown in Table 3.

Table 3: Cheapest-to-Deliver Treasury Bond

Coupon	Maturity or first call date	Price (flat)	Accrued interest	YTM/YTC	PVBP $ per million par	Duration	Conversion factor	Cost of delivery
13.250%	11/15/17	135.4375	3.4217	9.166%	1110.0814	7.99429	1.4899	-4.8502

Klein wants to compute the interest rate sensitivity of the highlighted bond in Table 2. She assumes that the yield increases by one basis point. How much, per $1 million par position, will the value of this bond change (to the nearest dollar)?

A) -$1,211.

B) -$12.

C) $121,123.

D) -$121,123.

Baran

 

The correct answer is A

 

This is the price value of a basis point (PVBP) per one million dollar par as shown in Table 2.

Baran

Using the information in Table 2, Klein would like to compute the duration of the highlighted bond. Which is the closest to Klein's answer?
A) 9.06.
 
B) 10.54.
 
C) 12.11.
 
D) 8.88.

Baran

The correct answer is D

PVBP = (0.0001) × D × (price + accrued interest) × 10,000
Note: The 10,000 is to convert the price to $1,000,000 par to match the PVBP units.
Rearranging, D = PVBP ÷ (price + interest) = 1,211.2284 ÷ (133.75 + 2.5824) = 8.88

Baran

Klein would like to quantify the approximate value loss of her portfolio from an increase in yields according to her expectations. Using the information in Table 1 which of the following is the closest to Klein's answer?
A) -$1,211,228.
 
B) -$888,438.
 
C) -$8,884.
 
D) $8,884.

Baran

The correct answer is B

Change in portfolio value = -0.001 × duration × portfolio value. Change in portfolio value = -0.001 × 8.88438 × $100,000,000 = ?$888,438.

Baran

 

AIM 4: Define and compute effective duration, and interpret the effective duration of a fixed income security, given a change in yield and the resulting change in price.

1、The most commonly used measure of interest-rate risk is:

A) duration.  

B) maturity. 

C) yield.  

D) coupon.

Baran

 

The correct answer is A

 

Duration measures the sensitivity of an instrument’s market value to changes in interest rates. Note that maturity, yield, and coupon, are all features of bonds that tie into determining duration.