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LOS b: Discuss the use of repurchase agreements (repos) to finance bond purchases and the factors that affect the repo rate.
Q1. Which of the following CORRECTLY describes a repurchase agreement?
A) The sale of a security with a commitment to repurchase the same security at a specified future date and a designated price.
B) The sale of a security with a commitment to repurchase the same security at a future date left unspecified, at a designated price.
C) The purchase of a security with a commitment to purchase more of the same security at a specified future date.
Q2. An agreement whereby the seller of a security agrees to “repurchase” it from the buyer on an agreed upon date at an agreed upon price is called a:
A) commercial paper.
B) negotiable certificate of deposit.
C) repurchase agreement.
Q3. Which of the following is least likely to expose the lender in a repurchase agreement (repo) to credit risk related to the delivery of the collateral?
A) The borrower has their bank hold the collateral instead of the lender in the repo agreement.
B) The borrower files for bankruptcy before the collateral is delivered.
C) The borrower sells the collateral prior to delivery.
Q4. Joy Richards’ bond portfolio consists of three issues: Bond A, B, and C. She has approached her investment advisor, Susan Cupp, CFA, to assess her portfolio and consider possible adjustments. The table below illustrates Richards’ positions.
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Bond A |
Bond B |
Bond C |
|
Par Value |
$50,000 |
$60,000 |
$40,000 |
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Market Value |
$52,000 |
$61,000 |
$40,000 |
|
Effective Duration |
8.2 |
6.8 |
5 |
Richards asks what is the effective duration of the portfolio, and what is the dollar duration for a 25 basis point parallel shift in the yield curve.
Richards wishes to investigate the use of leverage to increase return. Cupp says Richards should consider doubling her position in Bond C to $80,000 using the proceeds from a loan. Richards asks about sources of funds for such a leveraged position. Cupp says Richards could use the proceeds from a 3-month adjustable rate reverse repurchase (repo) agreement, or Richards could sell short zero-coupon bonds with a duration of 3. Richards asks Cupp to estimate the value of the leveraged portfolio in each case after a 25 basis point downward parallel shift in the yield curve.
Richards asks what the return of the leveraged position in Bond C would be if market yields do not change. Cupp computes the one-year holding period return of the $80,000 par value position in Bond C where 50% of the funds were borrowed at a 4% repo rate. Bond C’s coupon rate is 5% paid semiannually. The reinvestment rate is 4%. Cupp assumes that the repo rate, the reinvestment rate, and the market yield of the bond do not change over the one-year horizon.
The effective duration of Richard’s portfolio is closest to:
A) 6.8.
B) 5.9.
C) 6.6.
Q5. For a 25 basis point change in yield, the dollar duration of Richards’ portfolio is closest to:
A) $4,666.
B) $2,603.
C) $2,257.
Q6. Richards asks Cupp to explain the difference between duration and spread duration. Which of the following statements regarding duration and spread duration is least accurate?
A) Spread duration measures the sensitivity of non-Treasury issues to a change in their spread above Treasuries of the same maturity.
B) A parallel change in the yield curve will cause the spread duration to also change.
C) Spread duration measures used for fixed rate bonds include the nominal spread, zero-volatility spread, and option-adjusted spread (OAS).
Q7. Using the repo agreement, what is the effective duration of the leveraged portfolio?
A) 8.28.
B) 8.11.
C) 6.22.
Q8. If Richards uses the zero-coupon bonds to leverage her portfolio, what is the dollar duration of the leveraged portfolio for a 25 basis point change in interest rates?
A) $4,300.
B) $3,100.
C) $2,803.
Q9. What is the one-year holding period return of the $80,000 investment in Bond C using the repo agreement as the source of funds as described?
A) 5.4%.
B) 6.1%.
C) 5.9%.
Q10. Carlos Mendoza is a portfolio manager for a money management firm that caters to high net worth individuals. Mendoza’s firm has recently acquired the account of a new client, Forrest Thompson, and Mendoza has just met with him to establish his investment profile, return requirements, and tolerance for risk. Subsequent to the meeting, Mendoza has written an investment policy statement for Thompson that outlines approximate asset class allocations. Thompson informed Mendoza that his main investment objective is to maximize current income rather than to pursue aggressive growth opportunities. With this in mind, Mendoza suggested that approximately 40 percent of the portfolio’s assets should be allocated to fixed income securities, 40 percent in domestic equities, with the remainder in cash or cash equivalents. In accordance with Thompson’s tolerance for risk, suitable fixed-income investments have been defined as U.S. Treasury securities, mortgage-backed securities, asset-backed securities, and corporate bonds. All investments purchased for the portfolio must be rated investment grade or higher.
For the fixed income portion of the portfolio, Mendoza, with the approval of Thompson, has established the Salomon Brothers Broad Investment Grade Index (BIG) as the return benchmark. Mendoza will typically seek to keep the portfolio’s duration equal to that of the index. However, when market conditions warrant, the portfolio composition will be allowed to deviate slightly from the index from time to time in order to capitalize on short-term opportunities. In specific, Mendoza is authorized to alter the portfolio duration, within a specified range, to take advantage of any anticipated rate shifts. Because deviations from the index have the potential to lead to increased exposure to tracking risk, the portfolio is expected to outperform the index by 50 basis points, less management and transaction fees.
Thompson’s portfolio was previously managed by another asset management firm that Thompson felt had exposed his portfolio to excessive risk. One practice the other money manager frequently engaged in was to utilize repurchase transactions as a short-term investment vehicle. From time to time, cash in Thompson’s portfolio was loaned to broker-dealers in exchange for Treasury securities, which were deposited in a custodial account at a mutually agreed-upon bank. The repos were structured for time periods of thirty days or less, and Thompson was paid the prevailing rate of interest. Thompson has never been quite sure what the risks involved in the repo transactions were, and thought the previous manager did not provide him with enough information. Thompson has asked Mendoza to evaluate whether or not entering into repo agreements is an appropriate practice given his risk tolerance, and Mendoza offered to outline the associated advantages and risks.
Thompson’s inquiry about the basics of repo transactions leads Mendoza to examine other investment strategies that may or may not be appropriate for Thompson’s investment profile. Mendoza gives some consideration to introducing leverage to the portfolio, but he is concerned that Thompson does not fully understand the implications of a leveraged portfolio. Mendoza believes that without leverage, it will be difficult to achieve the stated objective of outperforming the BIG index by 50 basis points. He decides to demonstrate the effect of leverage on a sample portfolio to enable Thompson to be able to make informed decisions regarding basic portfolio management decisions. Mendoza constructs a hypothetical $5,000,000 bond portfolio with an unleveraged duration of 3.1 years. He then runs scenario analyses utilizing several levels of leverage under different changes in interest rates. Mendoza then calculates how the leverage affects the overall risk of the portfolio by measuring the change in the portfolio’s duration. He believes this is the best way to demonstrate to Thompson the potential benefits and drawbacks from such a strategy.
Mendoza’s approach to the management of Thompson’s bond portfolio would most likely be classified as:
A) indexing by minor risk factor mismatching.
B) enhanced indexing by matching primary risk factors.
C) active management by larger risk factor mismatches.
Q11. In the course of managing Thompson’s portfolio, Mendoza will utilize which of the following value-added strategies?
A) Interest rate expectations strategy.
B) Yield curve strategy.
C) Inter-sector allocation.
Q12. Which one of the following statements regarding repo transactions is most accurate?
A) As a short-term investment, a properly structured repurchase agreement is considered to be a high-quality investment.
B) The credit risk of a repo agreement depends solely upon the quality of the collateral.
C) When a securities dealer uses a repurchase agreement to borrow funds, it is called a reverse repo transaction.
Q13. Mendoza decides to loan out $4,000,000 of the portfolio’s Treasury securities on a 30-day repo. Assuming a repo margin of 3% and a repo rate of 4.5%, calculate the cash due at the conclusion of the trade.
A) $3,894,351.
B) $3,894,550.
C) $3,880,000.
Q14. Which of the following factors is least likely to cause a lower repo rate from the perspective of the lender?
A) Delivery of the collateral to the lender.
B) Hot collateral.
C) Collateral with a short term to maturity.
Q15. Utilize the hypothetical portfolio constructed by Mendoza and assume the portfolio is leveraged by 10 percent using a 30-day reverse repo transaction. What is the duration of the leveraged portfolio?
A) 3.44 years.
B) 3.10 years.
C) 2.82 years. | 
发表于 2009-3-6 10:06
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