# Question

The Citrix Fund has invested in a portfolio of government bonds that has a current market value of $44.8 million. The duration of this portfolio of bonds is 13.5 years. The fund has borrowed to purchase these bonds, and the current value of its liabilities (i.e., the current value of the bonds it has issued) is $39.2 million. The duration of these liabilities is four years. The equity in the Citrix Fund (or its net worth) is obviously $5.6 million. The market-value balance sheet below summarizes this information:

Assume that the current yield curve is flat at 5.5%. You have been hired by the board of directors to evaluate the risk of this fund.

a. Consider the effect of a surprise increase in interest rates, such that the yields rise by 50 basis points (i.e., the yield curve is now flat at 6%). What would happen to the value of the assets in the Citrix Fund? What would happen to the value of the liabilities? What can you conclude about the change in the value of the equity under these conditions?

b. What is the initial duration of the Citrix Fund (i.e., the duration of the equity)?

c. As a result of your analysis, the board of directors fires the current manager of the fund.

You are hired and given the objective of minimizing the fund’s exposure to interest rate fluctuations. You are instructed to do so by liquidating a portion of the fund’s assets and reinvesting the proceeds in short-term Treasury bills and notes with an average duration of two years. How many dollars do you need to liquidate and reinvest to minimize the fund’s interest rate sensitivity?

d. Rather than immunizing the fund using the strategy in part (c), you consider using a swap contract. If the duration of a 10-year, fixed-coupon bond is seven years, what is the notational amount of the swap you should enter into? Should you receive or pay the fixed rate portion of theswap?

Assume that the current yield curve is flat at 5.5%. You have been hired by the board of directors to evaluate the risk of this fund.

a. Consider the effect of a surprise increase in interest rates, such that the yields rise by 50 basis points (i.e., the yield curve is now flat at 6%). What would happen to the value of the assets in the Citrix Fund? What would happen to the value of the liabilities? What can you conclude about the change in the value of the equity under these conditions?

b. What is the initial duration of the Citrix Fund (i.e., the duration of the equity)?

c. As a result of your analysis, the board of directors fires the current manager of the fund.

You are hired and given the objective of minimizing the fund’s exposure to interest rate fluctuations. You are instructed to do so by liquidating a portion of the fund’s assets and reinvesting the proceeds in short-term Treasury bills and notes with an average duration of two years. How many dollars do you need to liquidate and reinvest to minimize the fund’s interest rate sensitivity?

d. Rather than immunizing the fund using the strategy in part (c), you consider using a swap contract. If the duration of a 10-year, fixed-coupon bond is seven years, what is the notational amount of the swap you should enter into? Should you receive or pay the fixed rate portion of theswap?

## Answer to relevant Questions

In mid-2012, Abercrombie & Fitch (ANF) had a book equity of $1693 million, a price per share of $35.48, and 82.55 million shares outstanding. At the same time, The Gap (GPS) had a book equity of $3017 million, a share price ...Find online the annual 10-K report for Peet’s Coffee and Tea (PEET) for fiscal year 2011 (filed in January 2012). Answer the following questions from their cash flow statement:a. How much cash did Peet’s generate from ...See Table 2.5 showing financial statement data and stock price data for Mydeco Corp.a. How did Mydeco’s accounts receivable days change over this period?b. How did Mydeco’s inventory days change over this period?c. Based ...Your firm needs to raise $100 million in funds. You can borrow short term at a spread of 1% over LIBOR. Alternatively, you can issue 10-year, fixed-rate bonds at a spread of 2.50% over 10-year Treasuries, which currently ...Apple Corporation had no debt on its balance sheet in 2011, but paid $8 billion in taxes. Suppose Apple were to issue sufficient debt to reduce its taxes by $1 billion per year permanently. Assume Apple’s marginal ...Post your question

0