2. Imagine you manage a fixed income bond portfolio and you are considering purchasing Citigroup's 5-year...

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2. Imagine you manage a fixed income bond portfolio and you are considering purchasing Citigroup's 5-year bonds. You gather the following information: Floating Rate Fixed Rate Citigroup 5-year bond coupons Citigrouop 5-year bond prices U.S. 5-year swap rate U.S. 5-yr Treasury rate [Note: the swap quote assumes the fixed rate leg is paid semi-annually. You can ignore any differing day count conventions here and assume all fixed and floating payments are made on an actual/365 day basis.] 5.00% 100% (par) 5-yr UST +10 bps 3.60% 6-mo. SOFR + 1.25% 100% (par) 6-mo SOFR a) Between Citigroup's fixed and floating rate bond yields, which alternative offers the best return to the fixed rate investor who considers the possibility of swapping floating rate bonds into a synthetic fixed rate return. What is the approximate advantage in basis points per annum of the better alternative? b) Now assume the floating rate bonds are trading at a price of 99%, instead of par. If all other inputs are unchanged from part a) above, would this lower price alter your decision? Why or why not? 2. Imagine you manage a fixed income bond portfolio and you are considering purchasing Citigroup's 5-year bonds. You gather the following information: Floating Rate Fixed Rate Citigroup 5-year bond coupons Citigrouop 5-year bond prices U.S. 5-year swap rate U.S. 5-yr Treasury rate [Note: the swap quote assumes the fixed rate leg is paid semi-annually. You can ignore any differing day count conventions here and assume all fixed and floating payments are made on an actual/365 day basis.] 5.00% 100% (par) 5-yr UST +10 bps 3.60% 6-mo. SOFR + 1.25% 100% (par) 6-mo SOFR a) Between Citigroup's fixed and floating rate bond yields, which alternative offers the best return to the fixed rate investor who considers the possibility of swapping floating rate bonds into a synthetic fixed rate return. What is the approximate advantage in basis points per annum of the better alternative? b) Now assume the floating rate bonds are trading at a price of 99%, instead of par. If all other inputs are unchanged from part a) above, would this lower price alter your decision? Why or why not?

Answer rating: 100% (QA)

a The floating rate Citigroup bond linked to 6month SOFR plus 125 offers a better return than the fi... View the full answer