MIDTERM FIXED INCOME MANAGEMENT
FEB 24, 2003-02-20
Answers with sound logic but wrong numbers will be looked at kindly.
Conversely, numbers without explanation will be viewed as incomplete
1. Today is February 24, 2003.
Deutsche Bank has among its liabilities a corporate bond with a coupon of 10% that pays semi annually and that matures August 15, 2010. Bloomberg quotes its dirty price today at 103.
a) What is the accrued interest ? (1point)
b) What is the bond’s clean price stated in $ ? (1point)
c) What do you think the approximate YTM of this bond is without calculation? Explain. (1point)
d) Rates are expected to drop in the near future. Would you recommend DB to swap this bond or not? Explain. (1point)
2. Suppose we know from market prices the following zero rates : Maturity Zero coupon rates
6 months 3.60%
9 months 3.80%
1 year 4%
Now, we consider bonds priced by the market until the 2 year maturity :
MATURITY COUPON PRICE
1 ½ year 4% 102.8
2 year 4.5% 102.5
2 ½ year 3.5% 98.3
Using the bootstrapping method, calculate (and show calculations) the 11/2 year , 2 year and 2 1/2 year zero rates (bonds pay twice a year). (3points)
3. . Consider the following Treasury securities :
Bonds Price Modified duration (years)
A $1000 8
Which bond will have the greatest dollar price volatility for a 0.50% change in interest rate ?
(2 points)
4. A fund manager has the following position:
Investment ($million) Maturity Duration
125 2 1.8
375 10 7.4
a) What is the duration of the portfolio? ( 1point) b) How much is lost if rates rise by 50BP? ( 1point)
c) Suppose the fund manager would like to change the overall duration of his portfolio to 5. by modifying the amount invested in the 2 securities. What new position should accomplish this ? (2 points)
5. Suppose that the coupon rate for a TIPS (Treasury Inflation Protection Security) is 3%. Suppose further that an investor purchases $10 000 of par value of this issue today. The semi annual inflation rate is 1%.
a. What is the dollar coupon interest that will be paid in cash at the end of the first 6 month? (( 1point)
b. What is the the inflation adjusted principal at the end of 6 month? ( 1point)
6. From the latest Treasury Bill Auction Results, determine the dollar price of each of the 3 securities (show calculations) (2 points)
Dollar price
28-DAY 02-20-2003 03-20-2003 1.155 91-DAY 02-20-2003 05-22-2003 1.160 182-DAY 02-20-2003 08-21-2003 1.180
7. Bonds are higher this morning following a slate of mostly negative economic
data, intact geopolitical concerns and seesawing equities. Thirty-year bonds are up 2/32, yield 4.81%. Ten-year notes are up 6/32, yield 3.86%. Two-year notes are up 1/32, yield 1.57%
Record trade deficit…dependence on strangers? The trade deficit rose to a record $44.242 billion in December
fund its current account deficit (the broadest measure of net flow of trade and investment income
Where are we going?…not sure. Leading economic indicators were unchanged in January as expected
From what you’ve learned so far in class, what does this mean to the future
