R19

Description

R19
Amit Mehta
Quiz by Amit Mehta, updated more than 1 year ago
Amit Mehta
Created by Amit Mehta over 4 years ago
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Resource summary

Question 1

Question
Building a dedicated portfolio of coupon-paying bonds to ensure that there are sufficient cash inflows to pay for scheduled cash outflows does not:
Answer
  • A rely on coupon payments and the maturing or sale of bonds to meet those cash outflows.
  • B qualify for accounting defeasance in which both the assets and the liabilities can be removed from the balance sheet.
  • C potentially suffer from the cash-in-advance constraint since sufficient funds must be available on or before each cash outflow date.

Question 2

Question
Consider the following characteristics of a company’s debt liabilities: MV = $50M, ModDur = 6, BPV = 30,000. The asset portfolio consists of the following: MVbonds = $65M, ModDur = 3, BPV = 19,500, long 70 interest rate futures contracts with a BPV of 75. The asset manager, following a contingent immunization approach, is:
Answer
  • A over-hedged in anticipation of falling rates.
  • B under-hedged in anticipation of rising rates.
  • C under-hedged in anticipation of falling rates.
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