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(FINA361)[2010](f)final~2047^_10024.pdf
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FIXED INCOME SECURITIES (FINA361) Final-term Exam: SHORT FORM SOLUTIONS
Question 1: Government Bond Market (Points 6) a) What is the main difference between the domestic and the foreign bond market? The issuer is domiciled in the country where the bonds are being issued. In the foreign bond market case the issuer is domiciled abroad. b) What are the TIPS? What should the coupon payment be at the end of 6mnths, 1st year and 1.5 year in the example below? TIPS are bonds where the principal is adjusted to the inflation rate.

Question 2: Eurodollar Futures Contract (Points 8)
An investor buys 10 ED Dec contracts at 96. a) What is the three months Libor that he is locking in? =100-96=4% b) Is he long or short the futures contracts? Explain why? He will invest 10*1,000,000=10mio dollar at 4% for three months. He is long the futures contract as he hopes the futures price will go up, therefore the Libor will drop. c) What is the invoice price? =10,000,000(1-4%*90/360)=9,900,000 dollar d) What would the invoice price be if the index drops by 15bps? -15*25*10=3750dollar 9,900,000-3750=9,896,250dollar

Question 3: Controlling risk using future contracts (Points 8)
The portfolio manager has initially allocated the money in bond A and B with respective weights of 40% and 60% of the 5 million notional. Modified duration of bond A is 5 and modified duration of bond B is 8. Bond A is also the deliverable bond for the future contract with conversion factor of 0.95. The manager sets the portfolio target duration to 5. Should he sell or buy futures contracts in order to keep its portfolio target duration intact without having to adjust the initial portfolio construction? How many futures contracts should he trade?
Portfolio duration=5*0.4+8*0.6=6.8
Sell= (5-6.8)*5mio/((5/0.95)*100,000=17 bond futures contracts


Question 4: Futures contracts (Points 8)
Investor X has bought 150 bond futures contract. The bond futures price is 100. The data on the deliverable bonds are given as below.
Bond Cash Price Conversion factor Gross Basis per bond
A 98-12 0.9912 98.375-100*0.9912=-0.745
B 96-6 0.9745 96.188-100*0.9745=-1.262

a) Based on the gross basis criteria, which bond should the seller of the futures contract deliver at the delivery date? Deliver bond B.
b) By how much will the invoice price for the cheapest to deliver bond change if the futures price drops by 25bps? Note that the minimum price fluctuation for the bond futures contract is 1/32nd of 1% (=100bps).
25bps/100bps=1/4 that corresponds to 8 times the 1/32nd. In terms of cash flow the change in the futures price would be 8*31.25$*150contracts=37,500 dollar. The change in the invoice price of the deliverable bond is 37,500*0.9745=36,543dollar.

Question 5: Swaps (Points 10)
Suppose that an interest rate swap has one year remaining life. The notional amount of the swap is $10million and all payments (fixed rate and floating rate) are quarterly based on an ac