FIXED INCOME MIDTERM
Today is March 4
th2004
Use the CIC secondary corporate bond sheet handed with this exam to answer the following questions :
1. As a bright fixed income portfolio manager, you decide to buy 100 bonds of each of the 2 “Electric” sector bonds, that is Siemens trading at 110 euros and Philips trading at 111. (In case you don’t know, they both build phones !!!!). They both pay annual coupon only.
What is your total cost ?
2. Using duration and convexity what is the value of the “Electric” portfolio if rates increase by 50BP? Siemens’ dur=5 convx=44
Philips’ dur= 6 convx= 41
3. What is the approximate YTM on those 2 bonds. Explain.
4. What would be your total cash flow generated by the Siemens bond if held to maturity ?
5. Comment on the spread analysis of the 2 bonds since 2002.
6. For a large change in the yield, please explain why the percentage price change of a bond is not the same for an increase in rates as it is for a decrease.
7. Explain how convexity gives a better measure of sensitivity.
9. From the CIC bond sheet, which bond (s) would you recommend to buy and why if you expect rates to stabilize until the US elections? Use your macro economic, fixed income and reading knowledge to answer this question (no more than 10 lines)
10. Assume the following information about a Treasury bond that pays twice a year
Coupon: 7%
Maturity: November 15, 2006. Purchase date: September 1, 2004. Last coupon paid: May 15, 2004. Yield: 6.75%.
Compute the modified duration of this bond.
