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LOS f: Design a bond immunization strategy that will ensure funding of a predetermined liability and evaluate the strategy under various interest rate scenarios. ffice ffice" />
Q1. 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 wider than that of the distribution of the liabilities.
B) 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.
C) 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.
Correct answer is A)
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.
Q2. 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) liabilities will decrease in value by more than the bank's assets causing the bank's equity (surplus) to increase.
B) assets will increase in value by more than the bank's liabilities causing the bank's equity (surplus) to decrease.
C) assets will decrease in value by more than the bank's liabilities causing the bank's equity (surplus) to decrease.
Correct answer is C)
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).
Q3. 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) greater than the required rate to ensure the funding, and it works best if interest rates stay the same or decline.
C) lower than the required rate to ensure the funding, and it works best if interest rates stay the same or decline.
Correct answer is B)
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.
Q4. 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) 6.0% with a 95% confidence interval at +/- 10 basis points.
B) 6.4% with a 95% confidence interval at +/- 40 basis points.
C) 6.0% with a 99% confidence interval at +/- 20 basis points.
Correct answer is B)
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.
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发表于 2009-3-5 17:53
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