R20 - Total Return + Immunization Flashcards

You may prefer our related Brainscape-certified flashcards:
1
Q

What is the Horizon Price of a bond?

A

PV of bond if cashflows reinvested at current yield

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Two ways to match liabilities?

A

Cash flow match - buy zero coupon default free bond; riskless; matches cashflow exactly; but expensive

Immunization - match duration of assets and liabilities;

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Requirements and assumptions of single-liability immunization:

A

Duration of asset and liability = horizon date
PVa = PV of liability
FV of asset = face value of liability to be paid

Assumptions:

  • one small immediate parallel shift in yield curve
  • liability amounts and dates don’t change
  • no assets default
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Why is rebalancing necessary when matching duration of assets and liabilities?

A

Because interest rates change over time (i.e. There is not just one parallel shift in yield curve)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Dollar Duration (DD) equation:

A

DD = Value x Duration x 0.01

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Rebalancing ratio (RR) equation:

A

DesiredDDp/newDDp = RR

If RR < 1, then sell bonds at 1-RR (percent to sell)
If RR > 1, then buy bonds at RR - 1 (percent to buy)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Types of spread duration?

A

Nominal - spread between treasury and non treasury
Zero-volatility - spread added to spot curve to equate cash flows and price
Option-adjusted spread - spread accounting for embedded options

How well did you know this?
1
Not at all
2
3
4
5
Perfectly