ABC Co. has a large amount of variable rate financing due in one year. The management is concerned about the possibility of increases in short-term rates. Which would be an effective way of hedging this risk? a. Buy Treasury notes in the futures market. b. Sell Treasury notes in the futures market. c. Buy an option to purchase Treasury bonds. d. Sell an option to purchase Treasury bonds
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ABC Co. has a large amount of variable rate financing due in one year. The management is concerned about the possibility of increases in short-term rates. Which would be an effective way of hedging this risk?
a. Buy Treasury notes in the futures market.
b. Sell Treasury notes in the futures market.
c. Buy an option to purchase Treasury bonds.
d. Sell an option to purchase Treasury bonds
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- You expect market interest rates to increase, while the rest of the market believes there will be a decrease. Which of the following statements about fixed-coupon bonds is most correct? a. Bond yields and prices are expected to rise b. At the maturity date, regardless of changes in market interest rates, a bond price will be equal to the face value plus the coupon. c. You expect the company to increase the coupon payment in response to the increase in market rates. d. As the coupons are fixed, the interest rate change will have no impact on the bond. e. You should invest in long-term bonds rather than short-term securitiesPlease kindly assist d & e. Thank you. Two bonds A and B have the same credit rating, the same par value and the same coupon rate. Bond A has 30 years to maturity and bond B has five (5) years to maturity. Please demonstrate your understanding of interest rates risk by answering the following questions :a. Discuss which bond will trade at a higher price in the marketb. Discuss what happens to the market price of each bond if the interest rates in the economy go up.c. Which bond would have a higher percentage price change if interest rates go up?d. Please substantiate your argument with numerical examples.e. As a bond investor, if you expect a slowdown in the economy over the next 12 months, what would be your investment strategy? Provide your explanations and definitions in detail and be precise.Now suppose a financial institution has a duration gap of -4 years and $5 million in assets. The cheapest to deliver bond for Treasury futures contracts has a duration of 3 years. How will the manager hedge this interest rate risk? Assume the cheapest to deliver bond is trading at par.
- Suppose that a commercial bank wants to buy Treasury bills. These instruments pay $6,000 in one year and are currently selling for $6,100. The yield to maturity of these bonds is%. (Round your response to two decimal places.) Is this a typical situation? OA. No. In normal times banks will not choose to pay more than the face value of a discount bond, since that implies negative yields to maturity. B. Yes. Often times, investors and banks will choose to pay more than the face value of a discount bond. It is more convenient to hold Treasury bills or keep their funds as deposits at the central bank because they are stored electronically.A trader needs to estimate the CVA on a swap. The exposure management group comes up with EPE of $6 million. With the collateral, the recovery rate of the firm is 60%. The discount factor is 0.9. The probability of default (PD) of the counterparty is 2%. The management group funds that the collateral's PD is positively associated with the PD of the counterparty. EE considering this association is $7 million. What is risk the association referring to and what is the CVA considering this risk? A. Wong-way Risk; 0.0504 m B. Right-way Risk; 0.0504 m C. Wrong-way Risk; 0.0432 m D. Right-way Risk; 0.0432 mCitibank has developed a way of creating a zero-coupon bond, called a strip, from the coupon-bearing Treasury bond by selling each of the cash flows underlying the coupon-bearing bond as a separate security. You as a treasurer working for Citibank, have a relatively simple trading strategy. You would buy strips and sell them in the forward market. Suppose for example, that the 3-month interest rate is 4% per annum and the spot price of a strip is $70. Q1)What will be the 3-month forward price? Q2)Assuming that the actual forward price is 72, formulate an arbitrage strategy.
- 9. Interest Rate Risk. Suppose that you are a fixed income portfolio manager at Bourbon Street Capital. You have the following bonds issued by Royal, Inc. and Chartres, LLC in your portfolio and you want to understand the risk profile of your portfolio. Given that both bonds pay semiannual coupons, answer the following questions. (Remember to convert your answer to units of full years.) Coupon Yield to maturity Maturity (years) Royal, Inc. Chartres, LLC. Bond A Bond B 9% 8% 5 $100.00 $104.055 8% 8% 2 Par $100.00 Price $100.00 (a) What is the DV01 (at current prices) for bonds A and B? (b) What are the Macaulay Durations (at current prices) for the two bonds? (c) What are the modified durations for the two bonds? (d) What is the convexity of the two bonds?Citibank has developed a way of creating a zero-coupon bond, called a strip, from the coupon bearing Treasury bond by selling each of cash flows underlying the coupon-bearing bond as a separate security. You as a treasurer working for Citibank, have a relatively simple trading strategy. You would buy strips and sell them in the forward market. Suppose for example, that the 3-month interest rate is 4% per annum and the spot price of a strip is $70. What will be the 3-month forward price?Assuming that actual forward price is 72, formulate an arbitrage strategy.A bond is a debt investment in which an investor loans money to an entity (typically corporate or governmental) which borrows the funds for a defined period of time at a variable or fixed interest rate. Suppose the bond issued by Logan Inc. has 5-year maturity with coupon of 12%. 4.1. If the yield to maturity is 10%, compute the bond value. Compute the modified duration of this bond. Use the modified duration to estimate the change in price if the interest rate decreases by 0.50%. 4.2. 4.3.
- Dudley Savings Bank wishes to take a position in Treasury bond futures contracts, which currently have a quote of 108 - 100. Dudley Savings thinks interest rates will go down over the period of investment. The face value of the bond underlying the futures contract is $100,000. a. Should the bank go long or short on the futures contracts? b. Given your answer to part (a), calculate the net profit to Dudley Savings Bank if the price of the futures contracts increases to 108 - 240. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g., 32.16)) c. Given your answer to part (a), calculate the net profit to Dudley Savings Bank if the price of the futures contracts decreases to 107 - 300. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g., 32.16)) a b. с The futures contracts Net profit Net profit Long с7. A. Define duration and explain how duration is used in the management of a portfolio of financial securities. B. Why is duration a better measurement of interest rate risk than the time it takes to reduce the principal balance on a loan by 50%? C. How does maturity and yield affect the sensitivity of a financial security to changes in interest rates?An Overview of Financial Management and the Financial Environment Differentiate between the following types of markets: physical asset vs. financial markets, spot vs. futures markets, money vs. capital markets, primary vs. secondary markets, and public vs. private markets the real risk free rate of interest is 3%. Inflation is expected to be 2% this year and 4% during the next 2 years. Assume that the maturity risk premium (MRP) is zero. What is the yield on a 2 year Treasury security? What is the yield on 3 year Treasury securities? If Apple Computer decided to issue additional common stock, and someone purchased 100 shares of this stock from Merrill Lynch, the underwriter, would this transaction be a primary market transaction or a secondary market transaction? Would it make a difference if the investor purchased previously outstanding Apple stock in the dealer market?