essay_course6

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1、COURSE6MORNINGSESSIONFINANCEANDINVESTMENTSSECTIONA—WRITTENANSWERQUESTIONSANDILLUSTRATIVESOLUTIONSMAY20001**BEGINNINGOFEXAMINATION6**MORNINGSESSIONILLUSTRATIVESOLUTIONS1.(4points)Youareaninvestorpurchasingthefollowingbond:·8-yearmaturity·Annualcouponpayments·4%annualcouponrate·Pricedtoyield4%per

2、year·Parvalue=1000·Marketvalueuponpurchase=1000·Noncallablebond·Macaulayduration=7.0yearsOnedayafterpurchasingthebond,interestratesincreasetoa6%annualrateandremainatthisleveluntilbondmaturity.Assumebondcouponscanbere-investedata6%annualrate.(a)Calculatethefollowingimmediatelyafterthefourthcoupo

3、npayment:(i)Theaccumulatedvalueofre-investedcoupons,(ii)Themarketvalueofthebond,and(iii)Thetotalannualreturn.Showallwork.(b)Explaintherelationshipbetweenthetotalannualreturnafterthefourthcouponpaymentandtheyield-to-maturitywhenthebondwaspurchased.2Course6–May2000–IllustrativeSolutionsQuestion#1

4、32(a)(i)=40b1.06g+40b1.06g+40b1.06g+40=$174.984040401040(ii)MVofBond=+++=$930.702341.06b1.06gb1.06gb1.06g(iii)TotalReturn=Capitalappreciation+Accumulatedinterest=–69.3+174.98=105.68F105.68I%Return=HGKJ=10.57%10001/4AnnualEff.Yield=b1.1057g-1=2.54%(b)TotalAnnualReturnislessthanoriginalyielddueto

5、theincreaseininterestratesandthepositivedurationofthebond.Theincreaseinreinvestmentreturnssomewhatoffsetthedecreaseinmarketvalue.Thelongertheholdingperiod,thebetterthereturnwouldhavebeen.Ifheldfor7years(durationofbond)theincreasedreinvestmentreturnswouldhaveexactlyoffsetthedecreaseinmarketvalue

6、andgivenyoutheinitialreturnof4%annual.32.(6points)Withrespecttofixedincomeportfoliomanagement:(a)Describethemechanicsofacashflowmatchingstrategy.(b)Describethetypesofcombinationstrategiesavailabletoaportfoliomanager.4Course6–May2000–IllustrativeSolutionsQuestion#2(a)Cash-FlowMatching-Thisisthep

7、rocessbywhichwehaveanassetmaturing(payable)touseatthesametimeasourliabilityisdue.-Canbeadifficulttaskmatchingallcashflows.-Mayhavetorebalanceifassetdefaults.Todothis,youmustunderstand:(i)Natureofyourliabilities-Inordertocash-flowm