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understanding management
Bond Evaluation Selection And Management 2nd Edition R. Stafford Johnson - Solutions
In your table, you may want to hide many of the rows and some of the columns. Do keep columns for period, balance, interest, scheduled principal, cumulative default loss, cumulative default rates, and cash flow. Using the program, find the following:a. The cumulative default losses and default
Using the MBS Collateral with Default Loss Excel program, create an Excel table for the mortgage collateral described in Question
Suppose ABC Bank has a fixed-rate mortgage portfolio with the following features: Mortgage portfolio balance = $100,000,000 Weighted average coupon rate (WAC) = 8% Weighted average maturity (WAM) = 360 months Default loss profile = 100 SDA No prepayment Complete the table: Item Beginning principal
Explain the difference between static yield analysis and vector analysis.
What is yield analysis?
Given the following mortgage collateral and PAC: Mortgage collateral = $100,000,000 Weighted average coupon rate (WAC) = 8% Weighted average maturity (WAM) = 360 months Estimated prepayment speed = 150 PSA MBS pass-through rate = PT rate = 7.5% PAC formed from the collateral with a lower collar of
Given the following mortgage collateral and sequential-pay CMO: Mortgage collateral = $100,000,000 Weighted average coupon rate (WAC) = 8% Weighted average maturity (WAM) = 360 months Estimated prepayment speed = 150 PSA MBS pass-through rate = PT rate = 7.5% Tranche A receives all principal
Given the following mortgage collateral and sequential-pay CMO: Mortgage collateral = $100,000,000 Weighted average coupon rate (WAC) = 8% Weighted average maturity (WAM) = 360 months Estimated prepayment speed = 150 PSA MBS pass-through rate = PT rate = 7.5% Tranche A receives all principal
Suppose interest-only and principal-only stripped MBSs are formed from the following mortgage collateral: Mortgage collateral = $100,000,000 Weighted average coupon rate (WAC) = 8% Weighted average maturity (WAM) = 360 months Estimated prepayment speed = 150 PSA MBS pass-through rate = PT rate =
Explain the interest rate and value relation for a principal-only stripped MBS and an interest-only stripped MBS.
Explain how the following CMOs are constructed and their features:a. Sequential-pay trancheb. Sequential-pay tranches with an accrual bond tranchec. Floating-rate and inverse floating-rate tranchesd. Notional IO tranchee. PAC and support bondsf. Sequential-pay PAC
What was the primary motivation behind the creation of MBS derivatives in the 1980s?
Explain the relationship between extension risk, prepayment risk, and average life.
Explain how interest rate changes affect a MBS differently than an optionfree bond.
What is the market value (clean price) of an 8% MBS issue backed by a mortgage pool with an original par value of $100 million, if its price is quoted at 105-16 with a pool factor of .95?
Define private-label pass-throughs and describe some of their features.
Define agency pass-throughs and describe some of their features.
Explain some of the factors that determine the prepayment speed on a mortgage portfolio.
Suppose the standard (100) prepayment profile for 10-year (120 month) conventional mortgages is one in which the CPR starts at zero and increases at a constant rate of .2% per month for 20 months to equal 4% at the 20th month;then after the 20th month the CPR stays at a constant 4%.a. Show
Suppose ABC Bank in Question 1 sells mortgage-backed securities backed by its $100 million portfolio of fixed-rate mortgages with the MBS having the following features: Mortgage collateral = $100,000,000 Weighted average coupon rate (WAC) = 8% Weighted average maturity (WAM) = 360 months Estimated
Suppose ABC Bank has a fixed-rate mortgage portfolio with the following features: Mortgage portfolio balance = $100,000,000 Weighted average coupon rate (WAC) = 8% Weighted average maturity (WAM) = 360 months Estimated prepayment speed = 150 PSA Complete the table: Item Balance Interest P Scheduled
Find the current currency quotes by going to the Wall Street Journal site: http://online.wsj.com/public/us Click “Market Data” tab. Click “Currency” tab.
Go to Wall Street Journal site and use their ETF Search Screener to find information on fixed-income ETF with a global strategy: http://online.wsj.com/public/us Click “Market Data” tab. Click “ETF” tab. Click “ETF Screener.” Fixed-Income
Find the current money market rates such as the Euro CP rate and LIBOR by going to the Wall Street Journal site: http://online.wsj.com/public/us Click “Market Data” tab. Click “Bond Rates and Credit Market.” Click “Money Rate.”
Go to the Wall Street Journal site and examine foreign government bonds and their yields: http://online.wsj.com/public/us Click “Market Data” tab. Click “Bond Rates and Credit Market.” Click “Global Government Bonds.” Click “Bond Rates and Credit Market.” Click “Money
Go to Yahoo’s Advanced Fund Screener to find information on global fixed-income mutual funds. Yahoo! Advanced Fund Screener: http://screen.yahoo.com/funds.html
Go to the FINRA site to find information on a foreign or global fixed-income mutual fund: Go to www.finra.org/index.htm, “Sitemap,” “Mutual Funds,” and “Fixed Income.” Look for emerging market debt funds, global income funds, and global debt funds.
After the 2008 financial crisis in which investors saw defaults in subprime MBSs, analysts began discussing the merits of European covered bonds. Examine this security by going to Council of European Covered Bond Facts Book: http://ecbc.hypo.org/Content/Default.asp?PageID=313.
Determine the recent LIBOR by going to www.bbalibor.com.
The London Interbank Offer Rate, LIBOR, is an important benchmark rate. It is used to determine the rates on many floating-rate bonds and loans. Find out more about the LIBOR by going to www.bba.org.uk.
Moody’s provides information on default rates, ratings changes, and other credit information. Examine some of their information as it is related to sovereign debt.To access Moody’s study of historical default rates: Go to www.moodys.com. Search for “Rating Methodologies and Performance.”
Study some of the sovereign bonds that have been added to Moody’s watch list: Go to www.moodys.com. Search for “WATCHLIST.”
Information on exchange rates, yields on Eurobonds, and interest rate actions by central banks can be found on www.fxstreet.com. At the site, examine the following: Spot exchange rates Forward rates LIBOR Other rates
Examine the impact of exchange rates on dollar investment returns. Calculate the dollar return you would earn by investing in a selected foreign-denominated bond: Go to www.research.stlouisfed.org/fred2. Click “Exchange Rates” tab, “By Country” tab. Download data to Excel. Example: For
Study the historical trends in Eurodollar CD rates and compare them to U.S.CD rates. Go to www.federalreserve.gov/releases/h15/data.htm and download the historical yields on Eurodollar CDs and CDs to Excel.
Describe the Interbank Foreign Exchange Market.
List some of the features that characterize Eurocurrency loans.
Define the London interbank bid rate (LIBID) and London interbank offer rate(LIBOR).
What is the interbank Eurocurrency market?
Comment on how the following events impacted the historical development of the Eurocurrency market:a. USSRb. Fixed exchange-rate system,c. U.S. banks circumventing U.S. bank lawsd. Petrodollarse. Offshore centers
Define the Eurocurrency market. What is the fundamental factor contributing to the growth of this market?
Define the following:a. Emerging market debtb. Cross-border riskc. Sovereign riskd. Brady bondse. Brady plan
How does the U.S. securities law requiring the registration of bond investors apply to the issuing of nonregistered Eurobonds by corporations? How does the law apply to U.S. investors?
Explain the following features associated with Eurobonds:a. Currency denominationb. Nonregistered (implication for U.S. investors and issuers)c. Credit riskd. Maturitiese. Dual currency clausesf. Option-currency clause
Describe the secondary market for Eurobonds.
Explain how Eurobonds are issued in the primary market through a syndicate.
Explain the significance of the Interest Equalization Tax and Foreign Withholding Tax in contributing to the growth of the Eurobond market.
List some of the popular foreign bonds and their names.
Define the following markets:a. Eurobondb. Foreign bondc. Internal market or national marketd. External or offshore markete. Global bond
The Pension Benefit Guarantee Corporation faces major financial issues with the default of a number of defined-benefit plans. Examine their current financial condition by going to www.pbgc.gov Click “FAQ” tab. Understanding the Financial Conditions of the Pensions Insurance
Go to the Social Security Fund Web site: www.ssa.gov.Click “Estimate Your Retirement Benefits” tab to estimate your retirement income.
Find information on Social Security Fund assets, benefits, and other information by going to the Social Security Fund Web site: www.ssa.gov.
Insurance companies and pension funds manage a large proportion of the economy’s assets. Their assets and liabilities and flow information can be found at the Federal Reserve Flow of Funds Accounts. Investigate their current balance sheets by going to the Federal Reserve Web site: Federal
Learn more about money market funds by going to www.ibcdata.com.
Learn more about mutual fund ratings by going to the Web sites of Morningstar, Lipper Analytical Services, and Quickens: www.morningstar.com;www.lipperweb.com; http://investing.quicken.com/investing/.
Study some of the recent trends in open and closed-end funds and ETFs by going to the Investment Company Institute Facts Book: www.icifactbook.org/index.html.
Information and news on investment funds can be found at the Investment Company Institute Web site and from the Investment Company Institute Facts Book. Learn more about funds by going to the Investment Company Institute:www.ici.org.
Learn more about real estate investment trusts by going to www.nareit.com.
Go to Yahoo! Finance and use their screener to find information on a real estate investment trust: http://screen.yahoo.com/funds.html Use Stock Screener to find REITs.
Go to the Wall Street Journal site and use their mutual fund search screener to search and find information on taxable and tax-exempt mutual funds: http://online.wsj.com/public/us Click “Market Data” tab. Click “Mutual Fund” tab. Click “Fund Screener.” Fixed-Income; Taxable and
Go to the Wall Street Journal site and use their ETF search screener to find information on fixed-income ETFs: http://online.wsj.com/public/us Click “Market Data” tab. Click “ETF” tab. Click “ETF Screener.” Fixed-Income
Find the current money market rates by going to the Wall Street Journal site: http://online.wsj.com/public/us Click “Market Data” tab. Click “Bond Rates and Credit Market.” Click “Money Rate.”
Go to the Wall Street Journal site and examine the following bonds and their yields: Exchange-traded corporate bonds Mortgage-backed securities Syndicated loans Guaranteed investment contracts http://online.wsj.com/public/us Click “Market Data” tab. Click “Bond Rates and Credit
Go to Yahoo!’s “Advanced Fund Screener” to search and find information on fixed-income mutual funds. Yahoo! Fund Screener: http://screen.yahoo.com/funds.html.
Go to the FINRA site to find information on fixed-income mutual funds:Go to www.finra.org/index.htm, “Sitemap,” “Mutual Funds,” and “Fixed Income.”
Moody’s provides information on default rates, ratings changes, and other credit information. Examine the default rates for syndicated bank loans and structured financed securities by going to their site. To access Moody’s study of historical default rates: Go to www.moodys.com. Search for
Study some of the recent intermediate securities added to Moody’s watch list: Asset-backed securities Residential MBSs Collateral debt obligations Leveraged finance Syndicated loans Go to www.moodys.com. Search for “WATCHLIST.”
Compare the historical yields on U.S. CDs to the yields on other money market securities. Go to www.federalreserve.gov/releases/h15/data.htm and download the historical yields to Excel.
Explain how financial institutions manage small IRA accounts as commingled funds.
Define the following:a. Employee Retirement Income Security ACT (ERISA)b. Pension Benefit Guaranty Corporation (PBGC or Penny Benny)c. Individual retirement accounts (IRAs)
Comment on how well the investments of pension plans are diversified.
What is the difference between a defined-benefit pension plan and a definedcontribution plan?
Define the following terms:a. Bank investment contractsb. Stable value investmentc. Bullet contractd. Window GICe. Floating-rate GIC
What is a separate account GIC contract?
What makes GICs an attractive investment for pensions and other institutional investors?
How does a guaranteed investment contract differ from an investment in a zero-coupon debenture?
What would an investor/policyholder receive from investing $1 million in a six-year GIC paying 6% interest compounded semiannually?
Define a guaranteed investment contract (GIC). List some of its features of the generic GIC.
Define:a. Annuitiesb. Life annuityc. Last survivor’s annuityd. Fixed-period annuitye. Variable annuityf. Deferred annuities
Explain why the price of an ETF should trade close to the underlying NAV.
Explain how an ETF is constructed. Include in your explanation the tracking methods, creation basket, authorized participant, and the issuance of ETF shares.
What are the primary investment objectives of the following: municipal bond fund, corporate bonds index fund, and money market fund?
List the principal classifications of bond funds.
Explain how hedge funds are structured. What types of investments do they make?
Define a unit-investment trust. Explain how a financial institution would set up a unit-investment trust with 10-year T-bonds with $100 million par value selling at par as the underlying securities and with 100,000 certificates created.
Define and explain the distinguishing features of the following funds:a. Open-end fundb. Closed-end fundc. Real estate investment trust
Define mortgage-backed security and explain how they are constructed. What is the primary risk that investors in MBSs are subject to?
Describe banker’s acceptances as a security, the secondary market for such securities, and some of the principal participants in the market.
A U.S. oil exploration company drilling in the Gulf of Mexico wants to purchase$20 million of drilling equipment from a German tool manufacturing company. Once the transaction agreement is complete, the drilling equipment will be shipped to the U.S. company’s drilling assembly operation facility
Define banker’s acceptance, acceptance financing, and accepting banks.
What are bank notes? How do they differ from medium-term notes issued by corporations?
Explain the history of the secondary CD market. In your explanation bring out the significance of a positively sloped yield curve that is not expected to change.
Describe the primary market for CDs. Who are the some of the major investors in CDs?
Define the following:a. Prime CDsb. Nonprime banksc. Yankee CDsd. Eurodollar CDse. Floating-rate CDsf. Bear and bull CDs g. Rising-rates CDS h. Forward CDs
Select a state and local government on Moody’s watch list or with a recent rating change and do an analysis of it with information obtained from the Bureau of Economic Analysis Web site: www.bea.gov. At the site, go to “Regional”data. You may want to look at employment data by going to
Moody’s provides information on default rates, ratings changes, and other credit information. Examine some of their information. To download Moody’s study of historical default rates: Go to www.moodys.com. Search for “Rating Methodologies and Performance.” Historical Performance. Review
Study some of the recent municipalities added to Moody’s watch list: Go to www.moodys.com, “U.S. Public Finance” and “Watchlist.”
Select a municipal bond from www.investinginbonds.com and then go to Moody’s to study its credit history and profile: Go to www.moodys.com. Enter CUSIP on “Quick Search” and click “Go.”
Trends and market conditions in the municipal market can be found at Muni Net. Visit the site to learn about some of the recent trends: www.muninetguide.com/categories/municipal-bond-documents-nrmsirs.php.
SIFMA provides a review of conditions and trends in the municipal bond market, Standard & Poor’s composite yield curves, and historical yields and total return for each state. Go to their site and examine recent conditions, yields curves, and returns of states of interest:
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