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Organizational Behavior 1st Edition OpenStax - Solutions
• identify the advantages of using interest rate futures rather than Treasury securities to control the interest rate risk of a portfolio.
12. Suppose that on some date the following information is available for the 10-year government benchmark of Country M and the United States:Country Yield to maturity Duration M 3.2% 6 U.S. 7.0% 4 From the perspective of a portfolio manager in country M, there is a 3.8% annual yield advantage to
11. Before making country and currency allocation decisions based on market outlook, an international bond portfolio manager should examine the expectations priced into the market.a. Where can amanager obtain information about the expectations priced into the market?b. Why does information priced
10. A British portfolio manager is considering whether or not to hedge the portfolio’s exposure to Country A’s currency. The following is the relevant information available to the manager, as well as the manager’s expectations:Expected bond return in Country A = 3.3%Short-term interest rate
9. A U.S. portfolio manager is considering whether or not to hedge his exposure to Country X’s currency. The following is the relevant information available to the manager, as well as the manager’s expectations:Expected bond return in Country X = 4.0%Short-term interest rate in Country X =
8.a. How can a portfolio manager hedge a long position exposure to a currency?b. How does a cross hedge differ from a proxy hedge?
7. Suppose the spot exchange rate between U.S. dollars and the local currency for Country A is US $2 for one unit of the local currency (LC). Assume the following interest rates in both countries:Maturity United States Country A 1 month 3.0% 8.5%3 months 3.5% 9.0%1 year 4.0% 10.00%5 years 4.9%
6. A portfolio manager is reviewing a report that shows the conventional yield on a 10-year U.S. Treasury bond (6%) and the conventional yield on a 10-year of Spanish government bond (5%). Coupon interest is paid annually on Spanish government bonds. The yield spread between the Spanish government
5.a. Coupon payments on U.K. government bonds are semiannual.What is the yield on an annual-pay basis for a U.K. government bond for which the conventional yield is 5%?b. Coupon payments on German government bonds are annual. What is the bondequivalent yield on a semiannual-pay basis for a German
4. Why is international bond investing more complex than investing in the U.S. bond market?
3. For a client that is interested in the diversification benefits of international bond investing, why might the selection of a longer-term time horizon (such as two to three years)be preferred to a short-term time horizon (for example, one quarter) to evaluate the performance of a manager?
2. Why might an absolute total-return investor be less concerned about how a portfolio’s composition differs from a benchmark?
1. Mr. Johnson is a trustee for the Wilford Corporate pension fund. At the present time the pension fund’s investment guidelines do not permit investment in non-U.S. bonds.A pension fund consultant suggested the trustees invest 30% of its fixed income portfolio in non-U.S. bonds. The benefit,
• explain the role of forward interest rates and forward currency rates in identifying investment opportunities.
• explain what bond and currency breakeven rates are.
• adjust bond yields for coupon payment frequency.
• determine whether a manager should employ an unhedged or some hedged strategy to manage currency risk exposure.
• compute the components of excess returns for an unhedged strategy, a hedged strategy, a cross currency hedged strategy, and a proxy hedged strategy.
• explain the following strategies for managing currency risk exposure: hedge, cross currency hedge, and proxy hedge.
• explain what covered interest arbitrage is.
• explain what interest rate parity is.
• compute the fair value of a currency forward contract.
• explain what a currency forward contract is.
• explain the three excess return components (excess returns on bonds, excess returns on currencies, and short-term interest rate risk) that can be generated from international bond portfolio management.
• explain objective measures of value and technical indicators used by international bond portfolio managers (real yields, technical analysis, and market sentiment surveys).
• identify the fundamental economic factors used by a portfolio manager to create an economic outlook for a country.
• explain the broad strategies (currency selection, duration management/yield curve plays, bond market selection, sector/credit/security selection, and off benchmark investing) that can potentially generate excess returns relative to an international bond index.
• discuss the styles of international bond portfolio management (the experienced trader, the fundamentalist, the black box, and the chartist).
• identify the key trading blocs for international bonds.
• explain the difference between the active approach to currency management and a fully hedged or unhedged approach.
• identify the benchmarks available to international bond investors.
• explain how international bond portfolio investment guidelines should incorporate the investor’s investment objectives.
• explain how the investor’s investment objectives are related to international bond portfolio management.
20. Ms. Smith is the portfolio manager of the Good Corporate Bond Fund, which invests primarily in investment-grade corporate bonds. The fund currently has an overweight within the retail industrial sector bonds of retailers. Ms. Smith is concerned that increased competition from internet retailers
19. Ms. Xu is the senior portfolio manager for the Solid Income Mutual Fund. The fund invests primarily in investment-grade credit and agency mortgage-backed securities. For each quarterly meeting of the board of directors of the mutual fund, Ms. Xu provides information on the characteristics of
18.a. Suppose that a manager believes that credit spreads are mean reverting. Below are three issues along with the current spread, the mean (average) spread over the past six months, and the standard deviation of the spread. Assuming that the spreads are normally distributed, which issue is the
17. The following appeared in the ‘‘Strategies’’ section of the September 27, 1999 issue of BondWeek (‘‘Firm Sticks to Corps, Agencies,’’ p. 6):The firm, which is already overweight in corporates, expects to invest cash in single A corporate paper in non-cyclical consumer
16. The following was reported in the ‘‘Strategies’’ section of the January 3, 2000 issue of BondWeek (‘‘. . . Even as Wright Moves Down.’’ p. 10):Wright Investors Services plans to buy triple B-rated corporate paper in the industrial sector and sell higher rated corporate paper on
15. The following was reported in the ‘‘Strategies’’ section of the January 3, 2000 issue of BondWeek (‘‘Chicago Trust to Move Up in Credit Quality,’’ p. 10):The Chicago Trust Co. plans to buy single-A corporate bonds with intermediate maturities starting this quarter, as the firm
14. An ABC Corporate issue trades at a bid price of 120 bp over the 5-year U.S. Treasury yield of 6.00% at a time when LIBOR is 5.70%. At the same time, 5-year LIBOR-based swap spreads equal 100 bp (to the 5-year U.S. Treasury).a. If a manager purchased the ABC Corporate issue and entered into a
13.a. Why has the swap spread framework become a popular valuation yardstick in Europe for credit securities?b. Why might U.S. managers embrace the swap spread framework for the credit asset class?c. Compare the advantages/disadvantage of the nominal spread framework to the swap spread framework.
12. What is the motivation for portfolio managers to trade into more current and larger sized‘‘on-the-run’’ issues?
11. When would a portfolio manager consider implementing a credit-defense trade?
10.a. What is meant by the ‘‘crossover sector of the bond market’’?b. How do portfolio managers take advantage of potential credit upgrades in the crossover sector?
9. Increases in investment-grade credit securities new issuance have been observed with contracting yield spreads and strong relative bond returns. In contrast, spread expansion and a major decline in both relative and absolute returns usually accompanies a sharp decline in the supply of new credit
8. What is the limitation of a yield-pickup trade?
7. The following passages are from Leland Crabbe ‘‘Corporate Spread Curve Strategies,’’Chapter 28 in Frank J. Fabozzi (ed.), The Handbook of Corporate Debt Instruments (New Hope, PA: Frank J. Fabozzi Associates, 1998).In the corporate bond market, spread curves often differ considerably
6. Chris Dialynas in ‘‘The Active Decisions in the Selection of Passive Management and Performance Bogeys,’’ (in Frank J. Fabozzi (ed.), Perspectives on Fixed Income Portfolio Management, Volume 2) wrote:Active bond managers each employ their own methods for relative value analysis.Common
5. In describing the approaches to investing in emerging markets credits, Christopher Taylor wrote the following in ‘‘Challenges in the Credit Analysis of Emerging Market Corporate Bonds,’’ Chapter 16 in Frank J. Fabozzi (ed.), TheHandbook of CorporateDebt Instruments(New Hope, PA: Frank J.
4. The following two passages are from Peter J. Carril, ‘‘Relative Value Concepts within the Eurobond Market,’’ Chapter 29 in Frank J. Fabozzi (ed.), The Handbook of Corporate Debt Instruments (New Hope, PA: Frank J. Fabozzi Associates, 1998), p. 552.a. In discussing Eurobond issuers,
3. The following quote is from Lev Dynkin, Peter Ferket, Jay Hyman, Erik van Leeuwen, and Wei Wu, ‘‘Value of Security Selection versus Asset Allocation in Credit Markets,’’Fixed Income Research, Lehman Brothers, March 1999, p. 3:Most fixed income investors in the United States have
2.a. What is the dominant type of structure in the investment-grade credit market?b. What are the strategic portfolio implications of the dominant structure answer in part (a)?c. What is the dominant structure in the high-yield corporate bond market and why is it not the same structure as discussed
1. What is meant by relative value in the credit market?
• explain sector-rotation strategies.
• understand the dominant role of fundamental credit analysis, the most important determinant of successful credit portfolio management.
• describe the typical shape of a credit spread curve and the difference in the slope of the curve for different quality issuers.
• explain structure analysis.
• explain the commonly used spread tools for making decisions (mean-reversion analysis, quality-spread analysis, and percent yield analysis) and their limitations.
• explain the reason for accepting swap spread as a relative-value measure.
• identify the main rationales for not trading.
• explain the popular reasons for executing trades in the secondary market (yield/spread pickup trades, credit-upside trades, credit-defense trades, new issue swaps, sector-rotation trades, yield curve-adjustment trades, structure trades, and cash flow reinvestment).
• explain how short-term and long-term liquidity for a bond influences portfoliomanagement decisions.
• explain the strategic portfolio implications of specific security structures that have come to dominate the credit markets.
• describe the credit structures that dominate the bond market.
• describe primary market analysis.
• explain what is meant by relative value.
• identify the types of securities that fall into the ‘‘credit asset class.’’
12. A client has granted permission for one of its external managers, ABC Financial Management, to employ a contingent immunization strategy. The amount invested by the client is $50 million and the client is willing to accept a 10% rate of return over a 4-year planning horizon. At the same time
11.a. What is the problem with using an actuarially assumed interest rate for valuing the liabilities of a defined benefit pension plan?b. What is the argument in favor of valuing the liabilities of a defined benefit pension plan using Treasury spot rates?c. What concerns would you have with using
10. A portfolio manager considering the use of multiperiod immunization is concerned about using the strategy for its pension fund clients. The manager’s concern is that its clients have projected liabilities that are beyond 30 years and therefore it would not be possible to immunize a portfolio
9. Several trustees of a pension fund are discussing with the fund’s consultant the fund’s bond portfolio tomeet future liabilities. The trustees understand there are two possibilities for structuring the portfolio: multiperiod immunization and cash flow matching. Which strategy has less risk
8. ‘‘I can immunize a portfolio by simply investing in zero-coupon bonds.’’ Comment on this statement.
7. A portfolio manager made the following statement: ‘‘To immunize a portfolio in order to satisfy a single liability, all that is necessary is that (1) the market value of the assets be equal to the present value of the liability and (2) the duration of the portfolio be equal to the duration
6. A portfolio manager is considering an immunization strategy for a client. The portfolio manager is concerned that the portfolio must be rebalanced very frequently in order to match the duration of the portfolio each day to the time remaining in the investment horizon. Comment on this portfolio
5. A portfolio manager is contemplating the implication of an immunization strategy. He believes that one advantage of the strategy is that it requires no management of the portfolio once the initial portfolio is constructed. That is, it is simply a ‘‘buy-and-hold strategy.’’ Explain
4. What is the basic underlying principle in an immunization strategy?
3.a. Why is a portfolio that has a duration of 5 not immunized against a parallel shift in the level of interest rates if the investment horizon is 3 years?b. How is a portfolio that has a duration of 5 impacted by a rise in interest rates over a 3-year investment horizon?c. Why is a portfolio that
2. What is the objective of a bond immunization strategy?
1. Why will the matching of the maturity of a coupon bond to an investment horizon date not lock in a return?
• explain a combination matching strategy.
• explain the advantages and disadvantages of a cash flow matching strategy relative to multiple liability immunization.
• illustrate how a cash flow matching strategy can be used to construct a portfolio to satisfy multiple liabilities.
• explain the different approaches suggested for valuing defined benefit plan liabilities.
• discuss the three conditions for creating an immunized portfolio to satisfy multiple liabilities.
• describe for a contingent immunization strategy the following concepts: safety net level return, excess achievable return, return achievable with an immunization strategy, and trigger point.
• identify the key considerations in implementing a contingent immunization strategy.
• describe what a contingent immunization strategy is.
• identify the factors to consider in creating an immunized portfolio.
• explain the ways classical immunization has been extended.
• identify the risks associated with immunizing a portfolio.
• explain why the key to immunization is constructing a portfolio with a duration equal to a target investment horizon.
• identify the interest rate risk exposure for a portfolio whose duration is not equal to the duration of a liability.
• describe what an immunization strategy is and why it is used.
29. Tom Reed is a portfolio manager for the MMM Investment Management Company.Recently he received $200 million from a new client to invest. The investment guidelines established by the client allow the manager to leverage the portfolio up to 25% of the$200 million, or $50 million. The investment
28.a. Why is the lender of funds in a repo transaction exposed to credit risk?b. What is the credit risk for a hold-in-custody repo?c. How do lenders in a repo transaction reduce credit risk?
27. Suppose that an investor owns a security that is on special in the repo market. If this investor wants to use this security to obtain financing, how will the repo rate compare to generic collateral for the same term?
26. An assistant portfolio manager is reviewing a daily printout of Treasury security yields published by a government broker/dealer.He notices that the on-the-run 10-year Treasury note is trading at a yield considerably less than the yield for Treasury securities with similar maturity or similar
25. Suppose that an investor purchases $3 million market value of a bond. The investor decides to borrow the funds via a repurchase agreement and the dealer is willing to lend 97% of the market value of the bond. The overnight repo rate is 7% and the 30-day term repo rate is 7.3%.a. What is the
24. The following statement appeared in an article in a popular daily publication. ‘‘Repurchase agreements are extremely risky vehicles.’’ Explain why this statement is ambiguous.
23. The investment guidelines for a pension fund specify that‘‘The manager of the fund is permitted to enter into repurchase agreements.’’Why is this provision confusing?
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