homework problem help (tell me how you get the answer )
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Question #1, Fixed Income Portfolio Management
You are a portfolio manager running a fixed income portfolio all of one bond. The bond is XYZ bond with a YTM of 5%, coupon 8%, term 6 years semiannual, BBB credit rating. The reinvestment rate assumption is 3%.
You have a $500M pension liability with a duration of 8 years.
Two derivative instruments available are:
- Tbond futures, priced at 97 with a duration of 3 and
- Interest rate swaps with a duration of 3.
- Calculate the bond duration.
- Calculate the # of bonds needed to fund the liability.
- Explain the conditions to immunize the portfolio using a classical duration-match immunization.
- Provide the number of Tbond contracts.
- If the reinvestment rate falls from 3% to 1%, provide the projected deficit.
- Provide the NP (notional principal of Interest Rate Swaps to hedge)
- Prove that the futures gain will > the loss attributed to the deficit.
- Prove that the IRS (interest rate swap) gain will > the loss attributed to the deficit.
- Indicate the type of swap needed.
2. Fixed Income Derivatives
The ZB US Treasury Bond Futures contract has a par of $100,000, an initial margin of $4,620, a maintenance margin of $4,200. The duration is 5 years and it is priced at 99. As an investor you open a futures trading account with $100,000.
- How many contracts can you open (long)?
- If the interest rates fall by 30 basis points, what is your ROI?
- If the interest rates fall by 30 basis points, what is your dollar profit?
- At what point will you get a margin call? Be specific.
- If the Federal Reserve started to raise the interest rates, would you
- Stay long?
- Reverse and go short?
- Desire to increase or decrease your portfolio duration?
Question #3. Credit
Exhibit 1, Balance Sheet
Company A Company B Sector Average
ASSETS
Current assets
Cash and cash equivalents 5 5 7
Marketable securities 5 0 2
Accounts receivable, net 5 15 12
Inventories 15 20 16
Prepaid expenses 5 15 11
Total current assets 35 55 48
Property, plant, and equipment, net
40 35 37
Goodwill 25 0 8
Other assets 0 10 7
Total assets 100 100 100
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable 10 10 10
Short-term debt 25 10 15
Accrued expenses 0 5 3
Total current liabilities 35 25 28
LIABILITIES AND SHAREHOLDERS’ EQUITY
Long-term debt 45 20 28
Other non-current
liabilities 0 10 7
Total liabilities 80 55 63
Total shareholders’ equity 20 45 37
Total liabilities and
shareholders’ equity 100 100 100
Question 4-A Based on Exhibit 1, which statement is most likely correct?
A Company A has below-average liquidity risk.
B Company B has above-average solvency risk.
C Company A has made one or more acquisitions.
Question 4-B The quick ratio for Company A is closest to:
A 0.43.
B 0.57.
C 1.00.
Question 4-C Based on Exhibit 1, the financial leverage ratio for Company B is closest to:
A 0.55.
B 1.22.
C 2.22.
Question 4-D Based on Exhibit 1, which ratio indicates lower liquidity risk for Company A
compared with Company B?
A Cash ratio
B Quick ratio
C Current ratio