Liability-Drive and Index-Based Strategy

Question 1

Which of the following is a benefit of a bond ladder strategy?

A. Ladder portfolios have less convexity than bullet portfolios
B. A laddered strategy focuses on price risk at the expense of higher reinvestment risk
c. Ladder portfolios create natural liquidity, which increases the ability to use less liquid bonds

Question 2

A UK-based company uses a duration-matching approach to immunize a significant part of its corporate debt liabilities. The immunizing portfolio consists of high-quality, coupon-paying bonds with superior credit quality compared to the company’s debt liabilities. Based on this information only, the company’s immunization strategy is most likely to face:

A. Model Risk
B. Counterparty Credit Risk
C. Spread Risk

Question 3

Maya Jonas manages a portfolio that is close to pure indexing, however, she wants to be able to take some action to reduce the cost of pure indexing. Currently interest rate volatility is expected to be low. Which of the following activities is Jonas most likely to do?

A. Overweight putable bonds
B. Overweight callable bonds
c. Overweight convertible bonds

Answer 3

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Question 4

Hans Wilsdarf specializes in risk management strategies with Bezel Limited and has been hired to defease $5 million of fixed income liabilities for a local municipality. The bonds under consideration are putable in May of 2021, pay interest semi-annually of 4.25%, and mature in 2030. Based on the bond’s underlying structure, the amount of cash outlay is known but the timing of cash outlay is unknown. These liabilities would be classified as:

A. Type I
B. Type IV
C. Type III

Question 5

The Bloomberg Barclays U.S. Long Treasury Index measures U.S. dollar-denominated, fixed-rate nominal debt issued by the US Treasury with 10 years or more to maturity. This index is most likely to be:

A. A ected by changing issuer composition
B. A static portfolio of bonds
C. Relatively stable as a benchmark

Question 6

The defined benefit pension plan of a US company has a large surplus but a significant negative basis point values (BPV) duration gap. The plan manager has the discretion to hedge 30% to 70% of the duration gap, with a 50% hedge considered the default process. She is considering three swap-based hedging choices.

Choice 1: Enter a 3.1% receive-fixed, pay LIBOR swap
Choice 2: Go long a receiver swaption with a strike rate of 2.5% and an expiration date coinciding with the next reporting date of the plan’s funded status.
Choice 3: Enter into a zero-cost collar composed of buying the receiver swaption in Choice 2 and selling a pay swaption with a strike rate of 3.8% and the same expiration date as the receiver swaption

Question 6

Which of the following statements relating to an immunization strategy for a single liability based on the concept of zero replication are correct?
Statement 1: The Macaulay duration of the portfolio of coupon-paying bonds must be continuously matched to the Macaulay duration of the ideal zero-coupon bond.

Statement 2: Immunization will be achieved if the change in the cash flow yield on the portfolio of coupon-paying bonds matches the change in the yield to maturity on the ideal zero-coupon bond.

A. Statement 2 only
B. Statement 1 only
C. Both Statements are Correct