Fixed Income Final Exam
April 15 2008
This is the world’s easiest fixed income final ever given. You deserve it after having “suffered” on the midterm. “Easy” also means I expect perfect answers.
Good luck !
1. What is the dirty price of a 4-year 6% corporate coupon bond paying annually and maturing April 15th, 2012 when zero-rates are the following :
1-year : 2% 2-year : 2.5% 3-year : 3% 4-year : 3.5%
2. Please list the major characteristics and differences between the Eurodollar futures contract and the US Treasury Bond futures contract (size, maturity, tick size, contract size etc…)
3. Draw a diagram explaining what a TRS is and explain its characteristics.
4. A 10-year zero coupon bond trades at 55. Calculate its YTM.
5. How long does it take to double a $100 investment when investing at a 5% continuously compounded rate? Show calculations.
6. Assume a 2-year note (pays coupon annually), 100,000€ par value, an annual coupon of 5% and a convexity of 2.7. If today’s YTM is at 4% and the term structure of interest rate is flat,
a. What is the bond’s duration?
b. What does convexity mean? Why does convexity differ among bonds? What happens to convexity when interest rates rise? Why?
c. What is the exact price change in euros if rates increase by 25 BP using duration and convexity?
7. A $50 million interest rate swap has a remaining life of 14 months. It involves exchanging 6-month Libor for 3% per annum. Use the following Libor forward rates to determine the value of the swap. The risk free rate stands at 4%.
6-month libor in 2 months : 2% 6-month libor in 8 months : 3 6-month libor in 4 months : 2.5% 6-month libor in 10 months : 3.5%
6-month libor in 6 months : 2.5% 6-month libor in 14 months : 3.5%
increase and would like to increase your overall return. What would you do using FRAs? Suppose the 3 X6 FRA trades at 5.5% / 6%. After 3 month the FRA trades at 7%/8%.
a. What is your overall profit ?
9. Find the following number: 5 7 2 14 19 5 ? 3 1
10. What are the 3 cash flows involved in the pricing of a CDS ?
11. T/F
a. The recovery rate affects the pricing of a CDS.
b. The accrued interest on a CDS in case of default is paid by the buyer of the protection
c. A downgrade can be considered as a credit event d. Accrued interest affects the price of the CTD bond.
e. High coupon bonds are more sensitive than zero coupon bonds f. A swap always has a zero value at its inception.
12. A portfolio manager holds a 15€ million (market value. )of long-term corporate bonds. The duration of the portfolio is 8. The portfolio manager expects rates to increase and would like to adjust its sensitivity by 20%. T-Bond futures trade at 107 (dur= 12). What should he do?
13. What is the ideal and ONLY financial instrument that would at the same time take advantage of a decrease in interest rates and eliminate credit risk?
This exam was 1 (easy) to 5 (hard) : watch what you say !!!!!!!!!!!!!!!!!
