Scribd Logo
Upload

Welcome to Scribd!

  • 89 views

    Jade

    Uploaded by

    Lucky Lucky
    This document contains 7 problems related to bond portfolio analysis and management. Problem 1 involves calculating the value of a position in discount bonds needed to hedge a portfolio against interest rate changes. Problem 2 asks about the duration of two bond portfolios and estimating the impact of an interest rate decrease. Problem 3 is about estimating the effect of an interest rate rise on a bond portfolio and making the portfolio insensitive to small rate changes.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd

    Jade

    Uploaded by

    Lucky Lucky
    89 views3 pages
    This document contains 7 problems related to bond portfolio analysis and management. Problem 1 involves calculating the value of a position in discount bonds needed to hedge a portfolio against interest rate changes. Problem 2 asks about the duration of two bond portfolios and estimating the impact of an interest rate decrease. Problem 3 is about estimating the effect of an interest rate rise on a bond portfolio and making the portfolio insensitive to small rate changes.

    Original Title

    Jade.docx

    Copyright

    © © All Rights Reserved

    Available Formats

    DOCX, PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    This document contains 7 problems related to bond portfolio analysis and management. Problem 1 involves calculating the value of a position in discount bonds needed to hedge a portfolio against interest rate changes. Problem 2 asks about the duration of two bond portfolios and estimating the impact of an interest rate decrease. Problem 3 is about estimating the effect of an interest rate rise on a bond portfolio and making the portfolio insensitive to small rate changes.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    89 views3 pages

    Jade

    Uploaded by

    Lucky Lucky
    This document contains 7 problems related to bond portfolio analysis and management. Problem 1 involves calculating the value of a position in discount bonds needed to hedge a portfolio against interest rate changes. Problem 2 asks about the duration of two bond portfolios and estimating the impact of an interest rate decrease. Problem 3 is about estimating the effect of an interest rate rise on a bond portfolio and making the portfolio insensitive to small rate changes.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 3

    PORTFOLIO ANALYSIS AND MANAGEMENT

    BOND PROBLEM SET

    1. The term structure of interest rates is currently flat r = 10%. You own a portfolio
    of bonds as follows:

    500 bonds, each with a 9.5% coupon maturing


    in 7 years,
    1200 bonds, each with a 6% coupon maturing in
    4 years.
    You wish to hedge against losses due to interest rate changes by taking a
    position in 7 year discount bonds. What must the value of your position be?
    After 4 years (when the 6% bonds have matured), how would you expect this
    position to have changed assuming rates remain constant up to and including
    that time period?

    2. Portfolio X consists of a 1-year zero-coupon bond with a face value of $2,000,


    and a 10year zero-coupon bond with a face value of $5000. Portfolio Y
    consists of a 5.63 year zero-coupon with a face-value of $5000. The current
    yield on all the bonds considered is 10% per annum.

    a) What is the duration of the two portfolios?


    b) Use duration to estimate the impact of a 0.5% decrease in the interest
    rate on the present values of the two portfolios.

    3. The term structure is flat at a rate of 6%. You are currently managing the
    portfolio of bonds listed below:

    long 500 of 6.5% coupon bonds t = 4 (maturity date)


    long 1,000 of 8.0% coupon bonds t = 3
    short 800 of 8.5% coupon bonds t=5

    (i) If interest rates rise by 0.5%, what is the estimated effect of that
    change on the value of your portfolio?
    (ii) You wish to reconfigure the relative positions in the 6.5% and
    8.0%bonds to make your portfolio insensitive to small rate changes.
    How would you accomplish this goal?
    4. A 5-year bond with a yield of 12% and face-value equal to $1000 pays an 8%
    coupon at the end of each year.
    a) What is the bond's price?
    b) What is the bond's duration?
    c) Use the duration to calculate the effect on the bond's price of a .2%
    increase in its yield.
    d) Recalculate the bond's price on the basis of a 12.2% yearly yield.

    5. You are expecting a cash-outflow for a payment due in 1 year and 325 days
    from now, and you are looking for an investment allowing you to get
    "immunized" against fluctuations in the yields. The yield curve is flat at the
    level of 13%. You are given the choice between the following two bonds:

    i) A bond with a coupon rate of 14%, yearly interest payments,


    and principal due in 2 years.
    ii) A bond with a coupon rate of 12%, yearly interest payments,
    and principal due in 2 years.

    What is the duration of each bond, at the given level of the yields, and
    which one of them should you invest in, given your objective? (In order to
    fix ideas, when you calculate the duration of the bonds, you can assume that
    the face-value of each one of them is equal to $1000).

    6. You currently hold a portfolio consisting of 100 of 1-year T-bill selling for $960
    and 150 3-year 5% coupon bonds. (Coupons are paid annually.) You want to
    immunize your portfolio against small changes in interest rates by using futures
    contract, written on 3-monts T-bill. How many futures contracts do you need to
    achieve this goal? Is it a long a short position? The term structure is currently flat.

    7. You observe the following anticipated floating rate swap payments, each based on
    a notional $ 100 M. Assume semi-annual compounding.

    Floating Payments

    t=0 0.5 1 1.5


    1 year swap 1M 1.1M
    1.5 year swap 1M 1.1M 1.12M
    a. Construct the implied term structure of LIBOR rates. What are the corresponding
    swap rates?
    b. You plan to sign a 1.5 year Eurodollar loan today (t = 0) for $l,000,000 for 1%
    over LIBOR. What is the no arbitrage forecast of the interest payments you will
    make at the end of each 6 month period?
    c. Rates may go up and your floating rate payments increase. Conceptually, how
    would you hedge this possibility?

    You might also like