Easiest Fixed Income Midterm exam ever
March 2nd, 2009 (30 points)
Please answer in order of questions
1. (5 points) Today is March 2nd 2009. You borrow $1MM (1,00,000 USD) for 18 months and decide to invest it for 15 months at the current market rates shown below : (use bid rates for his problem)
You wish to hedge the mismatched position. Use the adequate Eurodollar contract quotes from Eurodollar future handout to determine which FRA to use and its price (use last trade quote)
What amount to you deal for a complete hedge ?
When it comes to fixing the FRA after 15 months, the 3-month rate is 3.50% / 3.60%.
What is the settlement amount?
What is the overall profit or loss on the overall position at the end of the 18 months?
2. (4points)
Dollar and oil prices are inversely related : a) True b) False
What is the price of a zero coupon bond expiring in 10 years with a YTM of 6%?
a) $558 b) $441 c) $ 553 d) $690
A corporate bond trades at par with a coupon of 5% paid semi annually every January 1st. Today is March 2nd, 2009 . You wish to buy 50 bonds.
What is your total cost including accrued interest(consider 2-day settlement)?
a)$51 020 b) $50 043 c) $50 437 d) $50 431
A floating rated bond pegged to Libor will increase in coupon revenue as Libor increase
a) True b) False
a) below 8% b) above 8% c) at 8% d) none of the above
What is the dollar price of a 2 year bond with a coupon of 4% paying annually if the yield curve is flat at 5%
a) 74.37 b) 97.75 c) 105.75 d) 98.14
A callable bond has a higher YTM than a non-callable bond a) True b) False
The greater the liquidity, the highest yield required by the investor : a. True b. False
3. (3 points)What is the modified duration of a 2-year 4% coupon bond paying annually? Assume a flat yield curve at 5.5%.
This bond has a convexity of 20. What is the bond’s new price for a 100BP increase in yield using duration and convexity?
4. (2 points)Here are the following bids on the $70 billion face value of the 10-year Treasury bond auction. The Fed requested $20 billion.
JPM : 20 billion @4.65%
Merrill :15 billion @4.68%
Goldman Sachs: 15 billion @4.63%
Morgan Stanley : 22 billion @4.66%
Who gets what and what is the Fed’s bid on its share ?
5. (3 points) Based on the Eurodollar futures handout, what should a 6 X 12 FRA be priced at to eliminate any arbitrage possibility? Specify which futures contracts you use.
6. (2 points) If you expect the economy to recover in the second half of 2009, how would you expect the 2-10 year spread to behave and why? (3 lines max)
7. (2 points) You take a barbell spread trade long the 10-year and short the 5 year. You hope that :
a) Rates vary strongly
b) The ECB surprises the market c) The yield curve will steepen d) The yield curve will flatten
a) What quantity of Bond B must he buy to maintain the same sensitivity of his portfolio ? Show calculations.
9. (6 points)Use the Reuters Bond quotation handout to answer the following questions : a) Price each bond using the annuity formula. Use the circled information.
b) Calculate the accrued interest of each bond if necessary.
c) Suppose you own $10 million faced value of each of the 3 . What is the value of your portfolio?
d) You believe rates will decrease in the future and would like to adjust your duration by 20%. How many futures contracts should you buy/sell short to reach your objective ? (Tbond duration = 11)
BONUS Question: There are 3 people in a room. What is the probability that there are 2 persons of the same sex. Explain (2 points)
