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标题: Fixed Income【Session9- Reading 23】习题精选 [打印本页]
作者: mouse123    时间: 2012-4-1 14:28     标题: [2012 L3] Fixed Income【Session9- Reading 23】习题精选

If a bond portfolio manager specifies liabilities as a benchmark, she is attempting to earn a return that is:
A)
equal to or higher than the return promised to the liability holders.
B)
as high as possible.
C)
the least risky.


The manager that specifies liabilities as a benchmark must ensure that the rate of return earned in the portfolio satisfies the return promised to liability holders. (This objective may be accomplished by earning equal to or higher than the promised return.)
作者: andytrader    时间: 2012-4-1 14:32

Which of the following is a difference between the investment objective for a liability based benchmark and an index based benchmark? If liabilities are chosen as a benchmark:
A)
a return higher than the liability has to be achieved by any means.
B)
the objective is only return oriented.
C)
the objective is to match the amount and timing of the liability payments.


The objective when managing a portfolio against a liability is to maintain sufficient portfolio value to meet the liabilities.
作者: andytrader    时间: 2012-4-1 14:33

Why should a pension fund manager NOT manage against a typical broad-based bond market index?
A)
The manager might outperform the index.
B)
The duration of a typical broad-based bond market index and the liabilities of a pension fund are not similar.
C)
This indexing strategy may produce tracking error risk.


The pension fund manager should define the benchmark in terms of the pension liabilities that must be satisfied. Most broad-based bond market indexes have shorter durations. If the pension fund manager decides to use a bond index, then he should chose one that matches the duration of the pension plan.
作者: andytrader    时间: 2012-4-1 14:33

If a bond portfolio manager has specified the benchmark in terms of a bond index, she is attempting to earn a return that is:
A)
less risky than the index.
B)
as high as possible.
C)
equal to or superior to the index.


The manager that uses an index as a benchmark is attempting to earn a rate of return that is equal to or superior to the index.
作者: andytrader    时间: 2012-4-1 14:33

Which of the following is a difference between the investment objective for a liability based benchmark and an index based benchmark? If a bond index is chosen as a benchmark the:
A)
bond index has to be outperformed on a risk-adjusted basis.
B)
objective is primarily return oriented.
C)
objective will be less risk averse.


A passive bond portfolio manager's objective is to get as close to the index return as possible by mimicking the bonds in the index and matching their duration with the understanding that due to management expenses their return will be slightly less than the index. An active bond portfolio manager would attempt to at least meet the index return and outperform it. Outperforming an index on a risk adjusted basis implies using a risk adjusted measurement such as the Sharpe ratio to compare the manager's performance to the index which is not normally done when comparing the manager's performance to an index. In a liabilities based benchmark the portfolio manager's objective is to at least match the value of the liabilities when they come due.
作者: andytrader    时间: 2012-4-1 14:34

When the performance of an investment grade corporate bond portfolio is compared to a relevant bond index, which of the following statements about tracking error is CORRECT?
A)
If the return on the bond portfolio is substantially lower than the return on the bond index the tracking error is small.
B)
If the return on the bond portfolio closely matches the return of the bond index the tracking error is small.
C)
Tracking error refers to how closely the return on the bond index matches traders' expectations and is not related to the return on the bond portfolio.


Tracking error is incurred when the return on the bond portfolio deviates from the return on the bond index. Greater deviation means higher tracking error.
作者: andytrader    时间: 2012-4-1 14:34

Which of the following bond portfolio investment strategies has active management and is aggressive with large mismatches in all risk factors, including duration?
A)
Pure bond index matching.
B)
Active management/larger risk factor mismatches.
C)
Active management/full-blown active.


Active management/full blown active is the most actively managed type of bond portfolio and also has the highest potential returns and tracking error. On the opposite end of relative management activity is pure bond indexing which attempts to 100% replicate the index, resulting in the lowest tracking error of the alternative enhancement strategies.
作者: andytrader    时间: 2012-4-1 14:35

Enhanced indexing/minor risk factor mismatches is a bond portfolio management style that:
A)
minimizes transaction costs and management fees.
B)
has substantial deviation from the relevant bond index in the average quality of the bonds.
C)
does not deviate from the duration of the relevant bond index.


Enhanced indexing/minor risk factor mismatches does allow for some relative-value analysis by incorporating minor mismatches in sector and quality risk factors. There is no deviation from the duration of the index.
作者: andytrader    时间: 2012-4-1 14:35

Which of the following bond management styles results in a portfolio that most closely resembles the return performance of a bond index?
A)
Active management/full blown active.
B)
Enhanced indexing/minor risk factor mismatches.
C)
Enhanced indexing/ matching primary risk factors.


Enhanced indexing/matching primary risk factors does not try to fully replicate the index, as the pure bond approach does. This style uses a large sample of bonds to represent the risk factors present in the index, and, as a result, more closely resembles the index than the others listed.
作者: andytrader    时间: 2012-4-1 14:36

Which of the following is a difference between enhanced indexing by matching primary risk factors and enhanced indexing that allows minor risk factor mismatches? Enhanced indexing by matching primary risk factors:
A)
is essentially an active management strategy.
B)
allows larger mismatches between the index and portfolio return.
C)
allows smaller mismatches between the index and portfolio return.


Matching by primary risk factors means that the portfolio will be exposed to the same broad market moving movements as the index. Enhanced indexing with minor risk factor mismatches means that the portfolio will have the same duration as the index, but will have differential movements from the index due to sector, quality, term structure, etc… mismatches. Hence, the matching by primary risk factors will tend to yield smaller differences between index and portfolio returns.
作者: andytrader    时间: 2012-4-1 14:36

Which of the following is a difference between pure bond index matching and enhanced indexing that allows for minor risk factor mismatches? Enhanced indexing that allows for minor risk factor mismatches:
A)
allows larger mismatches between the index and portfolio return.
B)
is essentially an active management strategy.
C)
allows only smaller mismatches between the index and portfolio return.


Enhanced indexing with minor risk factor mismatches means that the portfolio will have the same duration as the index, but will have differential exposures from the index due to sector, quality, term structure, etc… mismatches. These differential positions will allow larger return mismatches between the portfolio and the index than that generated by the pure bond index matching approach.
作者: andytrader    时间: 2012-4-1 14:36

A commercial bank that borrows and then lends funds is most likely to specify its benchmark:
A)
in terms of the duration of its assets.
B)
in terms of its liability structure.
C)
as a bond index.


A commercial bank defines its benchmark in terms of meeting a specific amount of cash to satisfy the liabilities (deposits) on its books.
作者: andytrader    时间: 2012-4-1 14:37

A defined benefit pension plan is most likely to specify its benchmark:
A)
as a bond index.
B)
in terms of its liability structure.
C)
in terms of the Lehman Brothers Aggregate Bond Index.


The pension plan defines its benchmark in terms of meeting a specific amount of cash to satisfy the liabilities (pension benefits) on its books.
作者: andytrader    时间: 2012-4-1 14:38

Fixed-income investors whose objective is to generate sufficient cash to satisfy their liabilities specify the benchmark:
A)
as a bond index.
B)
as either a bond index or in terms of its liability structure.
C)
in terms of its liability structure.


Fixed-income investors whose objective is to generate sufficient cash to satisfy the liabilities specify the benchmark in terms of its liability structure.
作者: andytrader    时间: 2012-4-1 14:38

Which of the following most accurately describes the relationship between an investor's investment objectives and the benchmark chosen for performance evaluation? An investor with a:
A)
liability as a benchmark has an investment strategy to match the timing and amount of the payments corresponding to the liability.
B)
liability as a benchmark has an investment objective that is to earn a higher return than the cost of borrowing.
C)
bond index as a benchmark has as an investment objective to outperform the bond index.


The purpose of using the liability structure as a benchmark is to ensure meeting the liability payment streams, both in timing and amount.
作者: andytrader    时间: 2012-4-1 14:38

What is the investment objective for a pension sponsor who has a defined benefits based liability structure? The main objective is to:
A)
minimize prepayment risk.
B)
match the amount and timing of the liability.
C)
outperform a bond index.


Although the other answers are worthwhile activities in pension fund management, matching the liability structure should be the primary objective for the pension sponsor.
作者: andytrader    时间: 2012-4-1 14:42

Bruce Turner, CFA, is composing a fund to track a benchmark bond index. He decides to use enhanced indexing by matching primary risk factors. This method aligns the risk exposures of the portfolio by investing in:
A)
all the bonds in the index in the same proportion as the index and using leverage to enhance returns.
B)
a sample of bonds to match the primary index risk factors with the goal of minimizing construction and maintenance costs.
C)
all the bonds in the index in the same proportion as the index and using derivatives to enhance the returns.


Choosing a sample of bonds to match the primary risk factors is called enhanced indexing by matching primary risk factors. The goal is to match the risk factors while lowering construction and maintenance costs. The manager can also be selective when choosing the sample and try to select bonds that are the most undervalued.
作者: andytrader    时间: 2012-4-1 14:42

In aligning the risk exposures of a bond portfolio to those of a benchmark bond index, the purpose of matching key rate durations is:
A)
to hedge twists of the yield curve.
B)
to better match cash flows.
C)
to make adjustments for convexity.


Matching total duration will not necessarily hedge against changes in shape of the yield curve. Matching the durations of a few key rates along the yield curve will better hedge the fund against twists of the yield curve.
作者: andytrader    时间: 2012-4-1 14:43

The goal of enhanced indexing by small risk factor mismatches is to:
A)
match duration while allowing the manager to tilt the portfolio in favor of other risk factors.
B)
choose a subset of risk factors to match and manage, which may or may not include matching duration.
C)
match duration with a sample of bonds that are presumably undervalued so as to produce a higher return.


This is the goal of enhanced indexing by small risk factor mismatches.
作者: andytrader    时间: 2012-4-1 14:44

Fixed Income Asset Management, Incorporated, (FIAM) has traditionally managed fixed income portfolios for pension and endowment funds employing immunization and cash matching strategies. Recently, FIAM has accepted the responsibility for managing funds for which indexed and enhanced indexed strategies are appropriate. Ms. Debra C. Truxell, CFA, a senior manager at FIAM, has been promoted to Vice President for Index Bond Fund Management to lead the company in this new direction. To staff this effort, Truxell had to recruit several new employees. Since most of the newly hired employees had little experience with indexing strategies, Truxell thought it would be prudent to conduct a series of in-house training seminars.
Cara Moore, an expert in bond indexing strategies, presented the first seminar. She opened the session with a discussion of the risk characteristics that distinguish bond management styles. She stated the key risk factor that distinguishes indexing from active management is that indexing takes no position on duration, but may differ in terms of sector, yield expectations, and quality differences. The differences depend upon how far the portfolio falls along the indexing versus active management continuum.
Moore’s associate, James Higgins, noted that “lower costs, diversification, and stable performance are all advantages of indexing a portfolio to a large, well-diversified bond index.” He also said, “Simple replication of a bond index such as the Lehman Brothers Aggregate Bond Index is known as pure bond indexing. I recommend pure bond indexing for most passively managed portfolios because it is the most efficient means of reducing tracking error and is the easiest indexing strategy to implement in most circumstances.” Truxell supported his statement by saying, “The greatest cost benefit of indexing lies in pure bond indexing.”
During the second seminar, lead by Pilar Newman, the topic of matching based on various risk factors was addressed. One participant asked "Is it sufficient to match the duration of the indexed portfolio to the duration of the bond index to control for the primary risks of the bond index?" Newman replied, “Yes, that is precisely how portfolio managers protect against non-parallel shifts in the yield curve.” A second participant asked if modified duration is the appropriate measure of interest rate risk and Newman’s partner Martin George replied, “While modified duration accurately measures interest rate risk for bullet bonds, it does not accurately measure interest rate risk for bonds with embedded options.” Newman added that matching the sector, coupon, and maturity weights of the callable sectors of a bond index results in a better matching of the convexity of the index, which is desirable.
Nicholas Morgan, a long-time FIAM employee, is interested in implementing call exposure positioning. He understands that when bonds move from being priced to call to being priced to maturity, returns can be enhanced by increasing the portfolio’s relative exposure to call risk. He notes “bonds that are priced to maturity tend to underperform when rates fall and bonds that are priced to call tend to underperform when rates rise.” Morgan tells Truxell’s staff that they need to factor this in when implementing a call exposure enhancement strategy.Regarding bond indexing:
A)
Moore is correct regarding the primary factor that distinguishes indexing from active management; Truxell is incorrect regarding the cost savings from pure bond indexing.
B)
Moore is correct regarding the primary factor that distinguishes indexing from active management; Truxell is correct regarding the cost savings from pure bond indexing.
C)
Moore is incorrect regarding the primary factor that distinguishes indexing from active management; Truxell is incorrect regarding the cost savings from pure bond indexing.


Moore is correct. A full-blown active management strategy takes an aggressive approach to risk factor mismatches, including duration. Enhanced indexing maintains the same duration as the index. It is not until one moves up the risk spectrum into active strategies that a position regarding duration is taken.
Truxell is incorrect in her assessment of the cost savings from pure bond indexing. Full replication is extremely costly. In general, it is more difficult to fully replicate a bond index than a stock index. (Study Session 9, LOS 23.b)

Regarding the statements made by Higgins about bond indexing, he is:
A)
correct both with respect to the advantages of indexing and in his conclusions regarding pure bond indexing.
B)
incorrect both with respect to the advantages of indexing and in his conclusions regarding pure bond indexing.
C)
correct with respect to the advantages of indexing but incorrect in his conclusions regarding pure bond indexing.


Higgins is correct regarding the advantages of indexing. Diversification, lower costs, and stable performance relative to a non-indexed portfolio are all advantages of indexing. However, pure bond indexing is expensive and difficult to implement in a fixed-income portfolio due to the illiquidity of many of the bonds in the index. Therefore, Higgins is incorrect in the conclusions he draws regarding pure bond indexing (or full replication). (Study Session 9, LOS 23.b)
Truxell’s most likely reply to Newman’s answer to the question regarding duration matching would be:
A)
“As a matter of fact this type of matching is the best way to assure that the tracking error attributable to a yield shift is minimized.”
B)
“Matching the primary risk factors of the index such as duration, cash flow, sectors, quality, and callability is the most effective method".
C)
“It is not sufficient. Sector cell weighting is the recommended strategy to control for primary risk factors.”


To match the primary risk factors of an index managers commonly match several factors such as duration, cash flow, sectors, quality , and callability of the bonds in the index. Duration alone only protects against small parallel shifts in the yield curve. (Study Session 9, LOS 23.d)
Frederick Jackson, a recent college graduate and CFA candidate, asked Truxell if she felt that return enhancements could be realized through sector exposure. Truxell accurately replied,”Yes, as a matter of fact, it is possible to increase the yield of the portfolio without a proportionate increase in risk by:
A)
overweighting 1-5 year Treasuries and underweighting 1-5 year corporates.”
B)
underweighting 1-5 year Treasuries and overweighting 1-5 year corporates.”
C)
underweighting long-term Treasuries and overweighting long-term corporates.”


Short term (less than 5 years) corporate bonds have the most favorable yield spread per unit of duration risk. Overweighting these issues and underweighting short duration Treasuries is known as enhanced indexing by small risk factor mismatches. (Study Session 9, LOS 23.d)
With respect to comments made about duration:
A)
George is incorrect; Newman is correct regarding matching the convexity of the index.
B)
George is correct; Newman is also correct regarding matching the convexity of the index.
C)
George is correct; Newman is incorrect regarding matching the convexity of the index.


George is correct, modified duration does not effectively measure the interest rate risk of bonds with embedded options - we must use effective duration for that task. Newman is also correct regarding her statement about convexity. Matching the sector, coupon, and maturity weights of the callable sectors results in a better match of the convexity of the index. (Study Session 9, LOS 23.d)
Regarding callable bonds, Morgan is:
A)
correct in assuming that returns may be enhanced when a callable bond that is priced to call is replaced with a callable bond that is priced to maturity, however, he does not understand the relationship between interest movements and the performance of callable bonds.
B)
incorrect in assuming that returns may be enhanced when a callable bond that is priced to call is replaced with a callable bond that is priced to maturity. He also does not understand the relationship between interest movements and the performance of callable bonds.
C)
correct in assuming that returns may be enhanced when a callable bond that is priced to call is replaced with a callable bond that is priced to maturity, and he understands the relationship between interest rate movements and the performance of callable bonds, which will allow him to profit from rate changes.


Morgan is correct in assuming that returns can be enhanced by increasing a portfolio’s relative exposure to call risk when a callable bond that is priced to call is replaced with a callable bond that is priced to maturity. Usually callable bonds cannot be called for 5 to 10 years after being issued and the issuer of the callable bond will pay the investor an annual spread premium compared to a straight bond. However, he is backwards when it comes to over and underperformance of callable bonds when interest rates change. Bonds that are priced to call underperform when rates decline and as rates increase they outperform non-callables. The reason is that callable bonds “cap out” when rates fall and don’t fall as much as noncallable bonds when rates rise due to negative convexity. (Study Session 9, LOS 24.e)
作者: andytrader    时间: 2012-4-1 14:45

Why should total return analysis be used to assess the potential performance of a trade before the trade is implemented? Because total return analysis:
A)
can be used to assess the likelihood of a certain outcome which will affect the potential performance of a trading strategy.
B)
identifies the range of possible outcomes and therefore provides the manager with a feel for the risk associated with a trade.
C)
allows to quantify the potential performance of any trading strategy.


Total return analysis can be used with scenario analysis to assess the potential performance and risk associated with the wide variety of bond investment strategies. Total return analysis may be used to determine the potential performance, and scenario analysis may be used to ascertain how the performance will vary under different sets of assumptions.
作者: andytrader    时间: 2012-4-1 14:45

Why should scenario analysis be used to assess the potential performance of a trade before the trade is implemented? Because scenario analysis:
A)
consists of evaluating the worst-case scenario which enables an investor to know his highest potential loss of a trade.
B)
identifies the range of possible outcomes and therefore provides the manager with a feel for the risk associated with a trade.
C)
involves measuring the reactions of market participants under a variety of different scenarios which the manager needs to know before he makes a trade.


Total return analysis can be used with scenario analysis to assess the potential performance and risk associated with the wide variety of bond investment strategies. Total return analysis may be used to determine the potential performance, and scenario analysis may be used to ascertain how the performance will vary under different sets of assumptions.
作者: andytrader    时间: 2012-4-1 14:46

Potential performance and how that performance will vary can be assessed by which two factors, respectively?
A)
Trend analysis, scenario analysis.
B)
Total return analysis, scenario analysis.
C)
Scenario analysis, total return analysis.


Potential performance can be estimated with total return analysis, and how that performance will vary can be estimated with scenario analysis.
作者: andytrader    时间: 2012-4-1 14:46

A manager of a bond fund wishes to ensure funding of a predetermined liability. Contingent immunization is possible when the prevailing available immunized rate of return is:
A)
greater than the required rate to ensure the funding, and it works best if interest rates stay the same or increase.
B)
lower than the required rate to ensure the funding, and it works best if interest rates stay the same or decline.
C)
greater than the required rate to ensure the funding, and it works best if interest rates stay the same or decline.


Contingent immunization is only possible if the prevailing available immunized rate of return is greater than the required rate to ensure the funding. It works best if rates stay the same or decrease because the need to actually fully immunize never occurs.
作者: andytrader    时间: 2012-4-1 14:47

The manager of a bond fund is assessing several choices in attempting to immunize a portfolio. To meet a predetermined liability, the manager needs a 6% return. Which of the choices below would be the best in pursuit of that goal? An immunized strategy with a target return equal to:
A)
6.4% with a 95% confidence interval at +/- 40 basis points.
B)
6.0% with a 95% confidence interval at +/- 10 basis points.
C)
6.0% with a 99% confidence interval at +/- 20 basis points.


Of the three portfolios, the portfolio with a 6.4% target return and a +/-40 basis point confidence interval has the best chance of achieving the specified return. The chance of not achieving that return is (1 - 95%) / 2 = 2.5% or one out of 40. The portfolios with the 6% target return have only a 50% chance of achieving the specified return.
作者: andytrader    时间: 2012-4-1 14:48

The manager of a bond portfolio must immunize the portfolio to meet multiple liabilities over time. To do this the manager needs to:
A)
equate the duration of the portfolio with the duration of the composite of liabilities and have the distribution of durations of the portfolio’s assets be narrower than that of the distribution of the liabilities.
B)
make the duration of the portfolio higher than the duration of the composite of liabilities and have the distribution of durations of the portfolio’s assets be equal to that of the distribution of the liabilities.
C)
equate the duration of the portfolio with the duration of the composite of liabilities and have the distribution of durations of the portfolio’s assets be wider than that of the distribution of the liabilities.


Necessary conditions to meet multiple liabilities over time are for the durations to be equal and the distribution of durations of the portfolio’s assets to be wider than that of the distribution of the liabilities.
作者: andytrader    时间: 2012-4-1 14:48

A commercial bank takes in short-term deposits and the uses those funds to make longer term loans. As such, the duration of the bank’s assets tends to be longer than the duration of the bank’s liabilities. What will happen when interest rates rise? The bank’s:
A)
assets will decrease in value by more than the bank's liabilities causing the bank's equity (surplus) to decrease.
B)
liabilities will decrease in value by more than the bank's assets causing the bank's equity (surplus) to increase.
C)
assets will increase in value by more than the bank's liabilities causing the bank's equity (surplus) to decrease.


As interest rates rise, the long-duration assets will decrease in value by more than the short-duration liabilities. As assets decrease in value by more than liabilities, the bank’s equity (surplus) must decline (A=L+E).
作者: andytrader    时间: 2012-4-1 14:49

Which of the following is a relative measure of the interest rate sensitivity of a portfolio compared to an underlying index?
A)
Spread duration.
B)
Value at risk.
C)
Portfolio duration.


Spread duration is a relative measure of the interest rate sensitivity of a portfolio compared to an underlying index. The other choices are both absolute measures.
作者: andytrader    时间: 2012-4-1 14:49

Which of the following is an absolute measure of the interest rate sensitivity of a portfolio?
A)
Spread duration.
B)
Value at risk.
C)
Portfolio duration.


Portfolio duration is an absolute measure of the interest rate sensitivity of a portfolio.
作者: andytrader    时间: 2012-4-1 14:49

If a portfolio manager is interested in the interest rate sensitivity of her portfolio as compared to a Treasury bond index, which measure should she examine?
A)
Spread duration.
B)
Portfolio duration.
C)
Value at risk.


Since the portfolio manager is interested in the interest rate sensitivity of her portfolio as compared to a Treasury bond index, she should examine spread duration.
作者: andytrader    时间: 2012-4-1 14:50

Which of the following best describes the difference between spread duration and portfolio duration? Spread duration allows the manager to measure the sensitivity of portfolio value from changes in:
A)
both convexity and yield changes.
B)
the price of the underlying securities.
C)
yield levels relative to a benchmark yield.


With duration a parallel shift in the yield curve could be caused by a change in inflation expectations which causes the yields on all bonds, including treasuries, to increase/decrease the same amount. In spread duration, the shift is in the spread only, indicating an overall increase in risk aversion (risk premium) for all bonds in a given class.
作者: andytrader    时间: 2012-4-1 14:50

Two portfolios have the same portfolio duration but one of them has a higher nominal spread duration. How does the higher spread duration affect the portfolio characteristics? The higher spread duration portfolio will have:
A)
the same exposure to small parallel shifts in the Treasury curve but will have a higher exposure to changes in the yield difference between non-Treasury and Treasury bonds.
B)
the same exposure to small parallel shifts in the Treasury curve but will have a higher exposure to changes in the yield difference between long and short-term Treasury securities.
C)
a higher exposure to small parallel shifts in the Treasury curve and a higher exposure to changes in the yield difference between non-Treasury and Treasury bonds.


Nominal spread is the spread between the nominal yield on a non-Treasury bond and a Treasury of the same maturity.
作者: andytrader    时间: 2012-4-1 14:51

If interest rates rise sufficiently such that the dollar safety margin is negative in a contingent immunization strategy, which of the following statements is least accurate?
A)
Contingent immunization is still a viable alternative.
B)
The portfolio manager can no longer use contingent immunization.
C)
A switch to immunization is necessary.


If the dollar safety margin is negative, the present value of liabilities exceeds the present value of assets and the portfolio manager can no longer use contingent immunization. Equivalently, the portfolio manager must switch to immunization.
作者: andytrader    时间: 2012-4-1 14:51

A portfolio manager has decided to pursue a contingent immunization strategy over a four-year time horizon. He just purchased at par $26 million worth of 6% semiannual coupon, 8-year bonds. Current rates of return for immunized strategies are 6% and the portfolio manager is willing to accept a return of 5%. Given that the required terminal value is $31,678,475, and if the immunized rates rise to 7% immediately, which of the following is most accurate? The dollar safety margin is:
A)
positive ($370,765) and the portfolio manager can continue with contingent immunization.
B)
negative (-$1,423,980) and the portfolio manager must switch to immunization.
C)
positive ($6,158,602) and the portfolio manager can continue with contingent immunization.


We are given the required terminal value of $31,678,475.
Next, we calculate the current value of the bond portfolio: PMT = ($26,000,000)(0.03) = $780,000; N = 16; I/Y = 7/2 = 3.5%; and FV = $26,000,000; CPT → PV = $24,427,765.
Next, compute the present value of the required terminal value at the new interest rate: FV = $31,678,475; PMT = 0; N = 8; I/Y = 7/2 = 3.5%; CPT → PV = $24,057,000.
Alternatively $31,678,475 / (1.035)8 = $24,057,000
The dollar safety margin is positive ($24,427,765 − $24,057,000 = $370,765) and the manager can continue to employ contingent immunization.
作者: andytrader    时间: 2012-4-1 14:51

A portfolio manager has decided to pursue a contingent immunization strategy over a three-year time horizon. He just purchased at par $93 million worth of 10.0% semiannual coupon, 12-year bonds. Current rates of return for immunized strategies are 10.0% and the portfolio manager is willing to accept a return of 8.5%. If interest rates rise to 11% immediately, which of the following statements is most accurate? The dollar safety margin is:
A)
positive ($303,066) and the portfolio manager can continue with contingent immunization.
B)
negative (-$2,489,748) and the portfolio manager must switch to immunization.
C)
positive ($303,066) and the portfolio manager must switch to immunization.

We must first compute the required terminal value: PV=$93,000,000, N=6, I/Y=8.5/2=4.25%, PMT=0, compute FV=$119,382,132. Next, we calculate the current value of the bond portfolio: PMT=($93,000,000)(.05)=$4,650,000, N=24, I/Y=11/2=5.5%, and FV=$93,000,000, CPT → PV=$86,884,460. Next, compute the present value of the required terminal value at the new interest rate: FV=$119,382,132, PMT=0, N=6, I/Y=11/2=5.5%, CPT → PV=$86,581,394.
Alternatively ($119,382,132) / (1.055)6 = $86,581,394
The dollar safety margin is positive ($86,884,460 − $86,581,394 = $303,066) and the manager can continue to employ contingent immunization.
作者: andytrader    时间: 2012-4-1 14:52

Which of the following is NOT a key consideration in implementing a contingent immunization strategy?
A)
Identifying a suitable and immunizable safety net.
B)
Decide in advance about the frequency the portfolio will be rebalanced.
C)
Establishing well defined immunized initial and ongoing available target returns.


The frequency of rebalancing is determined (among other things) by the level of the safety net. So the rebalancing frequency is not exogenous to interest rate movements.
作者: andytrader    时间: 2012-4-1 14:52

In a contingent immunization strategy, which of the following is a reason why the minimum target return might NOT be realized? The minimum target return might not be realized because:
A)
interest rates move in a nonparallel manner.
B)
there is a rapid market yield movement.
C)
the yield volatility changes.


A rapid market yield movement might not give the manager enough time to shift from an active strategy to immunization mode to achieve the minimum target.
作者: andytrader    时间: 2012-4-1 14:52

A portfolio manager has decided to pursue a contingent immunization strategy over a three-year time horizon. She just purchased at par $84 million worth of 9.2% semi-annual coupon, 10-year bonds. Current rates of return for immunized strategies are 9.2% and the portfolio manager is willing to accept a return of 8.5%. Given that the required terminal value is $107,829,022, and if interest rates rise to 11% immediately, which of the following is most accurate? The dollar safety margin is:
A)
negative (-$3,237,038) and the manager can continue with contingent immunization.
B)
negative (-$3,237,038) and the manager must switch to immunization.
C)
positive ($1,486,948) and the manager can continue with contingent immunization.

We are given the required terminal value of $107,829,022. Next, we calculate the current value of the bond portfolio: PMT=($84,000,000)(.046)=$3,864,000, N=20, I/Y=11/2=5.5%, and FV=$84,000,000, CPT → PV=$74,965,511. Next, compute the present value of the required terminal value at the new interest rate: FV=$107,829,022, PMT=0, N=6, I/Y=11/2=5.5%, CPT → PV=$78,202,549. Alternatively ($107,829,022) / (1.055)6 = $78,202,548 The dollar safety margin is negative ($74,965,511 − $78,202,549 = -3,237,038) and the manager can no longer employ contingent immunization.
Therefore, a switch to immunization is necessary.
作者: andytrader    时间: 2012-4-1 14:53

John Gillian approaches Carl Mueller, CFA, about managing his bond portfolio. Gillian has two large bond positions. The first of these is $2.8 million face value with a coupon rate of 7.6% (paid semiannually), ten years to maturity, and is currently priced to yield 6.5%. The second position is $4.4 million face of zero coupon bonds that will mature in four years and are priced to yield 5.3%. Gillian asks about interest rate forecasts for the next four years. Mueller says that he expects yields to remain approximately the same (i.e. 6.5%) for maturities of six to 10 years. Gillian says that he needs to have at least $8 million in value at the end of four years.
After further discussion with Gillian about his goals, Mueller determines that a contingent immunization strategy would be the best approach for the coupon-bond position. Gillian asks Mueller to explain the strategy. Mueller says that it is a fairly simple strategy that has only two requirements: determining an available target return and an appropriate safety net return.
Mueller begins computing the necessary inputs for the coupon-bond position. He first calculates the required terminal value and associated target return. Given Gillian’s goal for the total portfolio value, Mueller computes the safety net return, cushion spread, and dollar safety margin.
Gillian asks how likely it is that Mueller will have to immunize the portfolio. He asks if Mueller’s immunization strategy would be required if there is a 50 basis point increase in the market yield today and the rates remain at that level for the next four years.Mueller’s description of the requirements of a contingent immunization strategy is:
A)
correct.
B)
incorrect because the strategy does not require an available target return although it does require an appropriate safety net return.
C)
incorrect because it is incomplete.


The strategy does require both an available target return and an appropriate safety net return. Mueller did not mention an important third step: the establishment of effective monitoring procedures to ensure adherence to the contingent immunization plan. (Study Session 9, LOS 23.i)
The most likely reason that Mueller did not discuss an immunization strategy for Gillian’s zero-coupon bond position is:
A)
there was no need to do so.
B)
it is possible to immunize zero coupon bonds, but it is very costly.
C)
it is impossible to immunize zero coupon bonds.


Since the maturity of the zero coupon bonds coincided with the investment horizon, there was no need to immunize that position. There is neither reinvestment nor price risk. (Study Session 9, LOS 23.k)
The required terminal value for the coupon-bond position is:
A)
$4.43 million.
B)
$3.4 million.
C)
$3.6 million.


Since Gillian requires a total of $8 million for his portfolio and the zero coupon bonds will mature with a value of $4.4 million, the coupon bonds have a required terminal value equal to $8 million minus $4.4 million, or $3.6 million. (Study Session 9, LOS 23.i)
The cushion spread for the coupon-bond position is:
A)
2.09%.
B)
2.20%.
C)
2.04%.


Cushion spread is the difference between current rates of return and the minimum required rate of return:
The current value of the coupon bond position is:
INPUTS: N= 20, I/Y = 6.5%/2 = 3.25%, PMT = 7.6%/2 = 3.8% of $2.8 million = $106,400, FV = 2,800,000,  CPT PV → PV = -3,023,906 (ignore minus sign)
The minimum required return based upon the required terminal coupon-bond position value of $3.6 million and its present value is (3,023,906)(1+X)8 = 3,600,000.  Solving for X we then have:
(1+X)8 = 3,600,000 / 3,023,906
(1+X)8 = 1.1905
1+X = 1.1905.125
1+X = 1.02204
X = .02204
I = 2.204% X 2 = 4.41%
Cushion spread = 6.50 - 4.41 = 2.09%
(Study Session 9, LOS 23.i)
The dollar safety margin for the coupon-bond position is closest to:
A)
$0.226 million.
B)
$0.237 million.
C)
$0.290 million.


This is the difference between the current value of the bond portfolio and the present value of the estimated terminal value given the current return:
Current value of the portfolio = $3.024 million as determined in the previous question.
Assets required given a terminal value of $3,600,000 and current rates of return of 6.5%:
3,600,000 / (1.0325)8 = 2,787,289
Dollar safety margin = 3,023,906 - 2,787,289 = 236,617
(Study Session 9, LOS 23.i)

Given the forecast of a 50 basis point increase in market yield on the coupon bonds, Mueller will:
A)
have to switch to an immunization strategy for the portfolio.
B)
have to switch to a passive management strategy for the portfolio.
C)
be able to continue with an active management strategy for the portfolio.


For a 50 basis point increase in market yields to 7.0% the present value of assets will then become:N = 20, I/Y = 3.5, PMT = 106,400, FV = 2,800,000, CPT PV → PV = -2,919,384
Assets required at the new interest rate of 7.0% =
3,600,000 / (1.035)8 = 2,733,882
The present value of assets of $2.9 million > present value of assets required of $2.7 million thus a 50 basis point increase in market yields will not trigger a switch to immunization to achieve the terminal value of $3.6 million for the coupon bonds. (Study Session 9, LOS 23.i)
作者: andytrader    时间: 2012-4-1 14:54

Which of the following refers to the risk that floating rate assets may have an upper bound on the interest rate whereby a maximum rate of interest on the asset is achieved?
A)
Call risk.
B)
Interest rate risk.
C)
Cap risk.


Cap risk is the risk that the interest rate is capped (has a maximum) and that interest income from the asset is then capped.
作者: andytrader    时间: 2012-4-1 14:55

Which of the following refers to the differences in interest rate sensitivity of the firm’s assets relative to its liabilities?
A)
Interest rate risk.
B)
Cap risk.
C)
Tracking error risk.


Interest rate risk refers to differences in the interest rate sensitivity of the firm’s assets versus its liabilities.
作者: optiix    时间: 2012-4-1 14:57

Which of the following risks associated with managing a bond portfolio is least accurate?
A)
Contingent claim risk is the risk that interest rates could increase, resulting in the cost of the firm's liabilities exceeding the return on its fixed-rate assets.
B)
Combination matching for multiple liabilities is the same as horizon matching.
C)
Price risk and reinvestment risk are the two components that comprise interest rate risk.


Contingent claim risk (a.k.a. call risk or prepayment risk) is the risk that interest rates could decrease with the bonds in the portfolio being called resulting in reinvesting the principal at reduced rates of return. To adjust for this potential, rather than simply comparing the portfolio duration to that of the liability, the manager must consider the convexity of the bonds. Cap risk is the risk that interest rates could increase, resulting in the cost of the firm’s liabilities exceeding the return on its floating rate assets if those assets contain caps.
作者: optiix    时间: 2012-4-1 14:57

Which of the following is the best definition of cap risk? Cap risk is the risk:
A)
associated with the issuer of a floating rate note with an embedded cap.
B)
that a floating rate note has an embedded cap.
C)
that the funding rate used to purchase a floating rate note exceeds the notes cap rate.


Cap risk is the risk that the cost of the firm's interest rate-sensitive liabilities exceeds the return on its capped assets in an environment of rising interst rates. Cap risk is a particular concern to investors who borrow at a floating rate.
作者: optiix    时间: 2012-4-1 14:58

Which of the following CORRECTLY describes cash flow matching for a single liability? Cash flow matching involves:
A)
selecting a bond with a present value equal to the present value of the liability and with the same maturity.
B)
selecting a bond with the same duration as the liability.
C)
selecting a bond whose cash flows coincide exactly with the payments of the liability.


Cash flow matching is matching up the cash flows from a bond to fund a liability stream so that the asset value of the bond is zero after the last liability is paid.
作者: optiix    时间: 2012-4-1 14:58

Which strategy for funding multiple liabilities uses a process for selecting bonds that have cash flows that correspond to those of the liability stream?
A)
Multiple liability immunization.
B)
Combination matching.
C)
Cash flow matching.


The cash flow matching strategy for funding multiple liabilities uses a process for selecting bonds that have cash flows that correspond to those of the liability stream.
作者: optiix    时间: 2012-4-1 14:58

The manager of a bond portfolio must immunize the portfolio with respect to a given set of liabilities. The manager is choosing between two immunization strategies: Strategy A and Strategy B. Strategy A has a lower return, lower risk, and a 99% probability of providing the required return to meet the given set of liabilities. The manager should choose Strategy B:
A)
under no circumstances, because risk minimization is the point of immunization.
B)
if that strategy’s higher risk is justified by the higher return, and only if the probability of meeting the liabilities is equal to or higher than that of Strategy A.
C)
if that strategy’s higher risk is justified by the higher return, and the probability of meeting the liabilities is equal to or only slightly lower than that of Strategy A.


In immunizing a portfolio a manager must consider a trade off between risk minimization and return maximization. Taking on extra risk under the indicated circumstances is appropriate. The probability of not meeting the liabilities can be allowed to decrease a little. There is no strict rule about the return and risk levels remaining “proportional”.
作者: optiix    时间: 2012-4-1 14:59

The manager of a bond fund is assessing several choices in attempting to immunize a portfolio to meet a lump-sum liability. If maximizing the return of the portfolio by taking on more risk with active management is the goal of the manager, then the manager should:
A)
choose a portfolio with a high and positive cushion spread.
B)
choose a portfolio with a low and positive cushion spread.
C)
not consider immunizing the portfolio at all because maximizing return is incompatible with immunization.


Maximizing return is not incompatible with immunization. The manager can engage in more active trading to maximize return when the cushion spread is higher.
作者: optiix    时间: 2012-4-1 15:00

The manager of a bond fund is assessing several choices in attempting to immunize a portfolio. To meet a predetermined liability, the manager needs a five percent return. Which of the choices below would be the best in pursuit of that goal? An immunized strategy with a target return equal to:
A)
5.2% with a 95% confidence interval at +/- 20 basis points.
B)
6.0% with a 95% confidence interval at +/- 100 basis points.
C)
5.6% with a 95% confidence interval at +/- 50 basis points.


Of the three portfolios, the portfolio with a 5.6% target return and a +/-50 basis point confidence interval has the best chance of achieving the needed return. The chance of not meeting the 5% return is LESS THAN (1-95%)/2 = 2.5% because, the 95% interval does not include the target 5%. The portfolios with the 6% target return and 5.2% would have exactly a 2.5% probability of not achieving the goal.
作者: optiix    时间: 2012-4-1 15:00

Which of the following explains the extension of cash flow matching for multiple liabilities? Cash flow matching for multiple liabilities is achieved by:
A)
selecting a bond whose principal plus final coupon is equal to the last liability, then selecting another bond whose principal plus final coupon along with the first bond's coupon is equal to the second to last liability, and so on until all liabilities have been matched.
B)
buying and selling bonds in a way to match the cash flows of a liability stream.
C)
selecting bonds with present values equal to the present value of the liability stream and with the same maturity.


The first bond is matched to the last liability, the remaining elements of the liability stream are reduced by the coupon payments of this bond, and another bond is chosen for the next to last liability, adjusted for any coupon payments of the first bond selected. This process is continued until all liabilities have been matched by payments on the securities selected for the portfolio.
作者: optiix    时间: 2012-4-1 15:01

Which of the following statements concerning the process of cash flow matching for funding multiple liabilities is CORRECT? Find bonds with:
A)
an average duration equal to the average duration of the liabilities.
B)
durations equal to the durations of each liability.
C)
maturity dates equal to the maturity dates of each liability payment.


The process is to find bonds with maturity dates equal to the maturity dates of each liability payment.
作者: optiix    时间: 2012-4-1 15:02

Which strategy for funding multiple liabilities is a combination of multiple liability immunization and cash flow matching?
A)
Horizon matching.
B)
Contingent immunization.
C)
Treasury yield curve plus spread approach.


The horizon matching (or combination matching) approach uses a combination of multiple liability immunization and cash flow matching.



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