FINA 4326

 
Investments Analysis Portfolio Management

Review for Final Exam

Selected Problems From Lecture Slides and Assignments

Jayoung Nam
SMU Cox School of Business

FINA 4326
 Question: Immunization

You are managing a portfolio of $1 million. Your target

duration is 10 years, and you can invest in two bonds – a
zero-coupon bond with maturity of 5 years and a perpetuity,
each currently yielding 5%.

A. How much of (i) the zero-coupon bond and (ii) the

perpetuity will you hold in your portfolio?

B. How will these fractions change next year if target

duration is now 9 years?
 Question: Assignment #6

Find the duration of a 6% coupon bond making annual coupon

payments if it has three years until maturity and has a yield to maturity
of 6%. Note: The face value of the bond is $1,000. Specify the unit as
well.
Hint: 1  y 1  y   T  c  y 

y c[(1  y )T  1]  y

FINA 4326
 Question: Assignment #6
 The yield to maturity on 1-year zero-coupon bonds is currently 7%; the
YTM on 2-year zeros is 8%. The Treasury plans to issue a 2-year
maturity coupon bond, paying coupons once per year with a coupon
rate of 9%. The face value of the bond is $100.
 
A. (2 points) at what price will the bond sell?
 

B. (2 points) what will the yield to maturity on the bond be?

 

FINA 4326
 Question: Assignment #6
The yield to maturity on 1-year zero-coupon bonds is currently 7%; the
YTM on 2-year zeros is 8%. The Treasury plans to issue a 2-year
maturity coupon bond, paying coupons once per year with a coupon
rate of 9%. The face value of the bond is $100.
  
C. (2 points) If the expectations theory of the yield curve is correct, what
is the market expectation of the price that the bond will sell for next
year? 

FINA 4326
 Question: Assignment #6
The yield to maturity on 1-year zero-coupon bonds is currently 7%; the
YTM on 2-year zeros is 8%. The Treasury plans to issue a 2-year
maturity coupon bond, paying coupons once per year with a coupon
rate of 9%. The face value of the bond is $100.
  
D. (2 points) If you believe in the liquidity preference theory and you
believe that the liquidity premium is 1%, what is the market expectation
of the price that the bond will sell for next year? 

FINA 4326
 Example Question: Lecture 14
Consider the performance data for Portfolio A and the benchmark
portfolio:

Benchmark Portfolio Manager A Portfolio

Component weight Returns Weight Returns
Equity 0.50 6.85% 0.80 8.18%
Bonds 0.45 2.25% 0.11 1.89%
Cash 0.05 0.20% 0.09 0.20%

A. What is the active return for Portfolio A?

 Example Question: Lecture 14
Consider the performance data for Portfolio A and the benchmark
portfolio:

Benchmark Portfolio Manager A Portfolio

Component weight Returns Weight Returns
Equity 0.50 6.85% 0.80 8.18%
Bonds 0.45 2.25% 0.11 1.89%
Cash 0.05 0.20% 0.09 0.20%

B. Using attribution analysis, calculate the contribution of asset

allocation to the overall excess performance of Portfolio A.
 Example Question: Lecture 14
Consider the performance data for Portfolio A and the benchmark
portfolio:

Benchmark Portfolio Manager A Portfolio

Component weight Returns Weight Returns
Equity 0.50 6.85% 0.80 8.18%
Bonds 0.45 2.25% 0.11 1.89%
Cash 0.05 0.20% 0.09 0.20%

C. Using attribution analysis, calculate the contribution of security

selection to the overall excess performance of Portfolio A.
 Question: Lecture 15

Suppose the shares of a closed-end fund are trading at a significant

discount relative to its NAV.

A. Is this a good investment opportunity?

B. How might a sophisticated investor want to immediately profit from

the discrepancy?

FINA 4326