A university endowment fund has sought your advice on its fixed-income portfolio strategy. The characteristics of the portfolio's current holdings are listed below:

a. Calculate the modified duration for this portfolio (i.e., Mod Dp).
b. Suppose you learn that the implied sensitivity (i.e., modified duration) of the endowment's liabilities is about 6.50 years. Identify whether the bond portfolio is: (1) immunized against interest rate risk, (2) exposed to net price risk, or (3) exposed to net reinvestment risk. Briefly explain what will happen to the net position of the endowment fund if in the future there is a significant parallel upward shift in the yield curve.
c. Briefly describe how you could increase the convexity of the portfolio while keeping the modified duration at the same level.
d. Your current active view for the fixed-income market over the coming months is that Treasury yields will decline and corporate credit spreads will also decrease. Briefly discuss how you could restructure the existing portfolio to take advantage of thisview.

  • CreatedDecember 17, 2014
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