Fixed Income Overview

Question 1

Roles of fixed-Income Securities in portfolio

Answer 1

diversification (low correlation with other major assets;
regular cash flows (funding future liabilities);
inflation hedge

Question 2

Fixed income mandates

Answer 2

liability based mandate to match future liability payments ;
total return mandate

Question 3

Types of liability based mandates

Answer 3

cash flow matching

duration matching - match duration of assets and liabilities

Question 4

Types of total return mandates

Answer 4

Pure indexing
enhanced indexing
active management

Question 5

levels of inflation protection for coupons

Answer 5

=% portfolio floating-coupon+% portfolio in inflation-linked bonds

Question 6

Measure the bond portfolio with embedded options

Answer 6

effective duration

Question 7

Macaulay Duration

Answer 7

a weighted average of time to receive the bond’s cash

Question 8

Modified Duration

Answer 8

MacDur/(1+r/m): % change in Δ price give 1%ΔYTM

Question 9

Effective Duration

Answer 9

%Δ price given 1% in a benchmark yield curve, as opposed to its own yield curve

Question 10

Money Duration

Answer 10

$Δ price

Question 11

Price Value of a Basis Points (PVBP)

Answer 11

DD*.0001

money gained or lost for each basis point change in the reference interest rate

Question 12

Which benefits of fixed income will reduce the return volatility? Diversification ,regular cash flow payment or inflation hedged bonds?

Answer 12

Answer: Inflation -linked bonds. Floating rate notes has little price risk while fixed coupon bonds have higher price risk when rates change.

Question 13

When interest rates increase, the value of the swap to the fixed rate payer(owner) will ________

Answer 13

The vale of the swap to the fixed-rate payer (owner) increases. Because PV of the fixed rate liability decrease, floating rate payment increases .