Deck 16: Bond Portfolio Management Strategies

Question 1

A portfolio manager that attempts to select bonds based on their intrinsic value would be carrying out

A) credit analysis
B) valuation analysis
C) yield-spread analysis
D) horizon-matching analysis
E) interest-rate analysis

Answer 1

B

Question 2

Horizon matching is a combination of

A) immunisation and valuation.
B) cash matching and immunisation.
C) valuation and cash matching.
D) all of the above.
E) none of the above.

Answer 2

B

Question 3

Consider two bonds, both pay annual interest. Bond C has a coupon of 6% per year, maturity of 5 years, yield to maturity of 6% per year, and a face value of £1000. Bond D has a coupon of 8% per year, maturity of 15 years, yield to maturity of 6% per year, and a face value of £1000. Calculate the modified duration for Bond C.

A) 4.47
B) 4.22
C) 4.34
D) 5
E) None of the above

Answer 3

B

Question 4

Which of the following is a matched funding technique?

A) Classical immunization
B) Contingent immunization
C) Bond swaps
D) Valuation analysis
E) Interest rate anticipation

Question 5

A pure yield pickup swap involves swapping out of a

A) bond to realise capital losses, into a comparable bond.
B) low coupon bond, into a comparable high coupon bond.
C) high coupon bond, into a comparable low coupon bond.
D) bond that is underpriced, into a comparable bond that is overpriced.
E) bond that is overpriced, into a comparable bond that is underpriced.

Question 6

Coupon reinvestment risk arises because the yield to maturity calculation implicitly assumes that all coupon flows will be reinvested at the

A) coupon rate.
B) effective rate of interest.
C) realised yield to maturity.
D) promised yield to maturity.
E) existing yield as the coupons are paid.

Question 7

Which of the following statements is true?

A) If duration > investment horizon, the investor faces net reinvestment risk.
B) If duration < investment horizon, the investor faces net price risk.
C) If duration = investment horizon, the investor is immunised.
D) All of the above statements are true.
E) None of the above statements are true.

Question 8

In core-plus bond management

A) 75 per cent of the portfolio is allocated to an equity index, and the balance to a bond index.
B) 75 per cent of the portfolio is allocated to a bond index, and the balance to an equity index.
C) 75 per cent of the portfolio is allocated to a bond index, and the balance to actively managed bond sectors.
D) 75 per cent of the portfolio is allocated to actively managed bond sectors, and the balance to a bond index.
E) None of the above.

Question 9

Horizon matching is a combination of

A) cash-matching dedication and interest rates swaps.
B) cash-matching dedication and immunisation.
C) interest rate swaps and immunisation.
D) enhanced indexing and immunisation.
E) enhanced indexing and interest rate swaps.

Question 10

The active strategies for bond management include all of the following, except

A) interest rate anticipation.
B) credit analysis.
C) spread analysis.
D) classical immunisation.
E) bond swaps.

Question 11

You are creating a portfolio that consists of the following two bonds. Bond A pays an annual 7% coupon, matures in two years, has a yield to maturity of 8%, and a face value of €1000. Bond B pays an annual 8% coupon, matures in three years, has a yield to maturity of 9%, and a face value of €1000. Calculate the price of Bond A.

A) €975.62
B) €982.17
C) €990.57
D) €1009.50
E) €1018.08

Question 12

Investment style for a bond portfolio is best characterised by

A) beta and credit quality
B) credit quality and duration
C) interest rate risk and yield to maturity
D) yield to maturity and beta
E) none of the above

Question 13

Consider two bonds, both pay semiannual interest. Bond A has a coupon of 8% per year, maturity of 30 years, yield to maturity of 9% per year, and a face value of €1000. Bond B has a coupon of 8% per year, maturity of 30 years, yield to maturity of 9.5% per year, and a face value of €1000. Calculate the percentage gain per invested dollar for Bond A assuming a one year horizon, and a reinvestment rate of 9% per year.

A) 9.73%
B) 9.93%
C) 9.20%
D) 8.20%
E) 9.50%

Question 14

Which of the following would not normally be a reason for a bond swap?

A) Increasing current yield
B) Improving the quality of the portfolio
C) Taking advantage of interest rate shifts
D) Tax savings
E) Realigning the portfolio's duration

Question 15

Contingent immunisation strategies

A) provide the bond portfolio manager to engage in various active portfolio strategies if the client is willing to accept a floor value.
B) insure that the modified duration of the portfolio is always equal to the desired investment horizon.
C) guarantee that the end of the holding period wealth will not be impacted by interest rate changes.
D) all of the above statements are true.
E) none of the above statements are true.