og ren cence cS a 5 School of Business Management, Hyderabad Progeam: Post Gniduate Diploma in Management (Batch-01) Year 1, Trimester V N“ Academic Year: 2012-2013 Subject: Fixed Income Securities & Debt Markets Marks: {00 Date: 18" December, 2012 ‘Time: 10:00 am to 1:00 pm (03Hrs) Final Examination ‘Answer any four L. Differentiate Yield to Maturity with Yield to Call. 8s the influence of following factors on prepayment of a mortgage loan. Prevailing Mortgage rates, Path of Mottgage rate 2. Di 5. Acredit default swap is used in a synthetic CDO. Discuss the relevance of the CDS ina synthetic CDO. 4, “Low coupon bonds are more volatile compared to high coupon bonds, Comment on the validity of the statement.” 5. Short-term investors such as money market mutual funds invest in floating-rate securities having maturities greater than one yeur, some with interest rafe caps and some without caps. Why is it improper to say that the above portfolio is less risky’? Section B Answer any four 4X 15=60 6. a.Rs.1,000 par value hond with an interest rete of14%, payable annually, mature after 4 years. Present neacket price is Rs, 950.Re investment rate applicable for the bond is 16%. Compute Realised Yield to maturity. (8) b. Caleulate the price of the bond fora market interest rate of 4% per half year, You sold the bond a year from now when market interest rate increased to 6%, The bond was having a par value of Rs, 1000, maturing in 30 years. Tthas offered a rate of 8%p.a for the semi annual payments, Calculate the efleetive return, a) 7. Voday is 1 Nov 2012. The investment porifolio of a bank is.as follows: Govt Bond Coupon Rate Purchase Rate(F V Rs.100) Go? 2014 10.95 102.50 GOI 2015 797 103.40 GO! 2016 8.38 404.004 Face value of total investment ie Rs. & Crores in each Government Bond. The bank, post recession is having huge amount of liquid funds, ‘There is more than scasonable illiquidity in the fong term bonds market, whereas short term bonds are as por normal liquidity. a, Calculate the weighted duration of the portfolio. (For YTM, approximation formula, can be used) A re) hb, What is a suitable action to churn out investment postfolio in the following scenatios? (treat both scenarios as independent) The abjeetive of the bank is to maintain its duration so 2s to mnect its Future liability and the chinge in interest rates should not affect the duration of the portfolio, ® a Interest rates are expected to Lower by 35 basis points. b, Interest rates ate expected to raise by 105 basis points 8. ¢. Discuss the impact of prepayment on cash Hows ofa Mortgage pass-through security. b, Compute the SMM for the following months with the cae pat PSA assumptions. mM Month 100%PSA —-70%PSA_——1659%PSA 1 2 50 9. The current one year rate is 10%, the up move factor is t= 1.05, the down move factor 0.75, the probability of up move is q= 0.6. Determine the term structure of interest rates at date /=0 for maturities 7 1,2, 3. a) Discuss the impact of following factors on yield curve. (8) Monetary poticy~ Quality of Credit Issues 10. a. Differentiate classical immunization with contingent immunization, What are some of fic assumptions of classical immunization? (8) the unrea b. Assume you have a mandate of managing a $500 million portfolio (through contingent immunization) wish atime horizon of five years. ‘The available market rate at the initiation of the posttofio is 14%, but the client is willing 10 accept 12% as a floor rate to The current market values and current market (7) allow use af active management strategi rates al the end of years 1,2 and 3 are as follows: Hid of year MValue = MYiekl ~—- Req Floor Safety Cushion 1 $555.9 12% 2 $610.5 ™% 3 $598.2 15%I 12. Compute the required floor for the respective years. As per the contingent immunization method what strategy you would adopt based on the above result? Discuss the following briefly. : (Sx3=15) Bond ladder stratgegy Collateral loan obligation Equity tranche in a CDO Section C. Compulsory 20X1=20 a. Differentiate theoretical spot rate with Z-Spread. © b. Suppose the annual yield 1o maturity for the 6-monih and 1-year Treasury bill is 5.6% and 6.0% respectively. These yields represent the 6-month and 1-year spot rates, Also assume the following treasury yield curve, (i.e the price for each issue is $100) has been estimated for 6-month periods out to a maturity of 3 years. Years to’ Maturity Annual YTM (BEY) 1S 64% 2.0 6.8% 25 74% 3.0 8.0% Compute the 1.5 year, 2 year, 2.5 year and 3 year spotrates. (sy