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business
understanding management

Questions and Answers of Understanding Management

Identify three levels of management
Determine the needs that affect a manager’s universe
Explain why organizations need managers
Evaluate several convertible bonds found using the FINRA site: Go to www.finra.org/index.htm, “Sitemap,” “Market Data,” and “Bonds.” To find convertible bonds, click “Corporate”
Evaluate several bonds with call and/or put options using the FINRA site: Go to www.finra.org/index.htm, “Sitemap,” “Market Data,” and “Bonds.” To find bonds with embedded options, use
Using a Monte Carlo simulation approach, determine the theoretical value of an MBS issue with a face value of $1,000,000, WAC = 8%, WAM = 10 years, PT rate = 8%, annual cash flows (instead of the
Determine the values for annual spot rates of 4%, 4.5%, 5%, 5.5%, 6%, 6.5%, 7%, 7.5%, and 8%. Assume the applicable binomial interest rate tree for the bonds has the following features: length of the
Using the Excel program “Binomial Bond Valuation,” generate the price-yield curves for (a) an option-free bond with a maturity of 10 years, annual coupon of C = 6, semiannual payments, and F =
Excel Problems: The Excel program called “Binomial Bond Valuation” can be downloaded from the Web site that is associated with this book. These programs can be used to price callable and putable
Given a current annual spot rate of S0 = 6%, upward and downward parameters on the spot rate of u = 1.2, d = 1/1.2, and q = .5:a. Determine the value of a three-year, option-free, 6% annual coupon
Given an ABC convertible bond with F = $1,000, maturity of three periods, CR= 10, current stock price of $100, and u = 1.1, d = .95, and q = .5 on the stock:a. Calculate the value of the bond using a
Given the following features of the XYZ convertible bond:Coupon rate (annual) = 10% (annual compounding)Face value = F = $1,000 Maturity = 10 years Callable at $1,100 YTM on a comparable,
Using the same interest rate tree you generated in Question 5, calculate the value of the sinking fund bond.
Suppose a corporation issues a $9 million, three-period, 5% coupon bond with a sinking fund obligation requiring the company to sink $3 million in period 1 and $3 million in period 2, with the
Given a current one-period spot rate of S0 = 5%, u = 1.1, d = 1/1.1, and q = .5, determine the values of three bonds stripped from the three-period, option-free 5% coupon bond in Question 5: a
Given a current one-period spot rate of S0 = 5%, u = 1.1, d = 1/1.1, and q= .5, determine the value of the three-period, option-free 5% coupon bond in Question 5 as the weighted average value of the
Given a current one-period spot rate of S0 = 5%, upward and downward parameters of u = 1.1, d = 1/1.1, and a probability of the spot rate increasing in one period of q = .5:a. Generate a two-period
Given an ABC convertible bond with F = $1,000, maturity of two periods, periodic coupon rate of 5%, conversion ratio of CR = 10, and an underlying stock with a current price of $100, u = 1.05, d =
Suppose a corporation issues a two-period, 9% coupon bond with the face value of the issue worth $9 million. Suppose the issue has a sinking fund obligation requiring the company to sink $3 million
Given a current one-period spot rate of S0 = 10%, u = 1.1, d = .9091, and q= .5, determine the value of the two-period, option-free 9% coupon bond in Question 1 as the weighted average value of the
Use the maximum constraint approach.g. Using the binomial interest rate tree, show at each node the put option values of the putable bond (PP = 99). Given your put option values, determine the values
Use the minimum constraint approach.d. Using the binomial interest rate tree, show at each node the call option values of the callable bond (CP = 99). Given your call option values, determine the
Given a current one-period spot rate of S0 = 10%, upward and downward parameters of u = 1.1 and d = .9091, and probability of the spot rate increasing in one period of q = .5:a. Generate a two-period
Form a Treasury and agency bond portfolio (with 10 to 15 bonds) using FINRA’s bond screener. Describe your portfolio in terms of the portfolio’s average YTM, maturity, and duration:
Form a Treasury bond portfolio (with 10 to 15 bonds) using Yahoo’s bond screener. Describe your portfolio in terms of the portfolio’s average YTM, maturity, and duration:
Form an investment-grade bond portfolio (with 10 to 15 bonds) using Yahoo’s bond screener. Describe your portfolio in terms of the portfolio’s approximate YTM, average quality rating, maturity,
Form a high-yield bond portfolio (with 10 to 15 bonds) using Yahoo’s bond screener. Describe your portfolio in terms of the portfolio’s YTM (approximate), average quality rating, maturity, and
Go to the FINRA or Yahoo! sites to find information on fixed-income mutual funds. Summarize some of their policy statements: FINRA: www.finra.org/index.htm, “Sitemap,” “Mutual Funds,” and
Select a state and local government bond on Moody’s watch list or with a recent rating change and do an analysis of it with information obtained from the Bureau of Economic Analysis Web site:
Select a municipal bond from www.investinginbonds.com (“Municipal Bonds At-A-Glance”) and then go to Moody’s to study its credit history and profile: www.moodys.com Enter CUSIP on “Quick
Corporate bonds on Moody’s watch list or those undergoing changes can be found by going to www.moodys.com and looking for “Corporate Finance” and then “Ratings Actions” and “Watchlist.”
Go to www.federalreserve.gov/releases/h15/data.htm. The site contains data on a number of different bond yields. Go to “Historical Data” and compare the annual historical yields on 10-year
What are some of the practical considerations required to effectively manage a contingent immunization position?
Suppose you set up a contingent immunization strategy for a $50 million fund you are managing. Suppose the horizon date for the fund is four years, the immunization rate is 10%, the minimum target
The present value of the pension’s liabilities is $450 million and the average duration of the liabilities is 10.a. What is the pension’s economic surplus?b. What would happen to the economic
ABC Trust manages a pension fund. The assets of the fund are in a bond portfolio currently worth $500 million and with an average duration of
What is a combination matching strategy? When is it used?
Explain the alternative ways in which multiple-period liabilities can be immunized.
Explain how initially immunized positions lose their immunization and how they can be rebalanced.
In a 1971 study, Fisher and Weil demonstrated that even though durationmatched positions were closer to their initial YTM than maturity-matched strategies, they were not absent of market risk. What
Suppose your horizon period is six years and you are considering the following investments:AAA-Rated, 6% coupon bond with annual coupon payments, maturity of 6 years, and Macaulay duration of 5.21
A 10-year, 5% coupon bond making annual payments has a Macaulay duration of eight years if the bond is priced at 92.64 per 100 face value to yield 6%. Show how classical immunization works by showing
What is the major risk associated with a cash flow-matching strategy? How can the risk be minimized?
Suppose an investment management fund has the following liabilities for the next four years:a. Construct a dedicated portfolio from 6% coupon bonds with different maturities that will match the
How are call features handled in constructing a bond index portfolio?
Given the information on the composition of a bond index in the table:a. Explain how you would construct a bond index portfolio using duration/sector and duration/quality sector approaches.b. Define
Suppose a bond index consists of municipal and corporate bonds, has durations ranging from 1 to 10, and has quality ratings ranging from B to AAA. Decompose the index into cells based on three
Explain the differences in bond indexing using the full-replication approach and a sample approach.
Explain how a tax swap is used to take advantage of the tax laws.
Explain the fundamental objective of fundamental bond analysis.
Briefly explain the policy objectives of high-yield bond funds and Chapter 11 funds.
List some of the important factors that should be considered in conducting a credit analysis of a corporate bond.
List the factors that should be considered in conducting a credit analysis of a revenue bond, and explain some of the ways of measuring them.
List the factors that should be considered in conducting a credit analysis of a general obligation bond and explain some of the ways of measuring them.
Comment on the objective of many strategies based on credit analysis.
Suppose an arbitrageur for a hedge fund finds two identical bonds trading at different YTMs: Bond A, an AA-rated, 10-year, option-free, 10% annual coupon bond trading at par, and Bond B, an AA-rated,
Suppose you are a strategist for a hedge fund. Your research indicates that the quality spread for BBB bonds and AAA bonds is 150 basis points in periods of economic slowdown and only 100 bp in
Given a current flat yield curve for AAA bonds at 6% and the following bonds:a. What is the portfolio duration of a barbell portfolio formed with equal allocation to Bonds A and C? How does the
You manage a fund in which you currently have $5 million invested in AA-rated, 15-year, 7% coupon bonds with semiannual coupon payments and currently priced to yield 6%. Interest rates have been
The yield curve for A-rated bonds is presently flat at a promised YTM of 10%.You own an A-rated, five-year, 10% coupon bond with annual coupon payments.You expect rates to decrease over the next year
Moody’s provides information on default rates, ratings changes, and other credit information on ABSs. Study the historical default rates and losses of ABSs by going to Moody’s. Go to
Moody’s provides information on ABSs, Commercial MBSs, and CDOs. Study the trends for these securities by going to Moody’s. Go to www.moodys.com. Look for “Structured Finance.” Look for
The Merrill-Lynch Price Index for ABSs can be found at Investinginbonds.com.Go to the site and check the current ABS index: Go to http://investinginbonds.com/; click “MBS/ABS Market At-A-Glance.”
Short-Answer Questions:a. What is cross-collateralization and how does it relate to cross-default protection?b. What is a fusion conduit deal? What protective provisions are often included with such
Explain how a synthetic CDO uses a credit default swap combined with an investment in high-quality bonds.
ABC is setting up a CDO with four tranches to be backed by $300 million collateral investment consisting of fixed-rate, investment-grade bonds with a par value of $300 million, a weighted average
Suppose the estimated absolute prepayment speed (APS) on a pool of automobile loans is 2.5%. What would be the monthly prepayment rate for the mortgage pool in month 15?
How do ABSs backed by automobile loans (CARs) differ from MBSs?
How is the payment of principal on an ABS backed by credit card receivables typically structured?
What is the main structural difference between an ABS formed with automobile loans, home equity loans, or residential mortgage loans and one formed with credit card receivables?
XYZ Inc. manufactures and sells machine tools with a large part of its sales coming from installment sales contracts. XYZ’s credit department makes decisions on extending credit, originating loans,
What is the important principle analysts must adhere to when examining commercial MBS deals?
Explain the two types of commercial MBS deals.
Explain the similarities and differences between commercial and residential MBSs.
Explain some of the features that characterize commercial mortgages.
Overcollateralization is used as a credit enhancement for ABSs. Explain what impact the 2008 financial crisis had on the collateral on nonagency MBSs and MBSs backed by subprime mortgages.
Explain how excess interest is set up with an interest-only account to provide a credit enhancement to a nonagency MBS.
Explain what is meant by a step-down provision as it relates to the shiftinginterest schedule in Question 4.
Determine the percentage of prepayment that would go to the senior and subordinate classes described in Question 3 given the following shifting-interest schedule: Years after Issuance 1-7 8 9 10
The table below shows a $300 million senior-subordinate structured MBS with one senior bond class and four subordinate classes:Answer the following:a. What is the senior interest?b. What is the
Determine the allocations of the$500 million principal for the senior and subordinate classes that the conduit would need if he wanted to eliminate the projected default losses based on SDAs of 100,
Suppose a conduit was structuring a senior-subordinate structured MBS deal based on the collateral described in Question
Suppose the collateral backing a nonagency MBS consists of a fixed-rate residential mortgage portfolio with the following features: Mortgage portfolio balance = $500,000,000 Weighted average coupon
Study the functions of the Depository Trust and Clearing Corporation by going to www.ficc.com and clicking “Mortgage-Backed Securities.”
Moody’s provides information on default rates, ratings changes, and other credit information on MBSs. Examine Moody’s study of historical default rates on MBSs: Go to www.moodys.com. Search for
SIFMA provides a review of conditions and trends in MBSs. Go to their site and examine recent conditions: Go to www.investinginbonds.com. Click “MBS/ABS Market At-A-Glance.”
Study the key terms and information of some Freddie Mac MBSs: Go to www.freddiemac.com. Click “Mortgage Securities.”
Study the prospectus and common pool information on a Ginnie Mae MBS by going to the Ginnie Mae site and downloading a prospectus. Go to Ginnie Mae: www.ginniemae.gov. To find the pool number, go
Study the prospectus and common pool information on a Fannie Mae MBS by going to the Fannie Mae site and downloading a prospectus. Use “Advanced Search” to find an MBS and its pool number: Go
The Merrill-Lynch Price Index can be found at Investinginbonds.com. Go to the site and check the current MBS index: Go to http://investinginbonds.com/; click “MBS/ABS Market At-A-Glance.”
Price and yield quotes on some MBSs can be found at the Wall Street Journal site. Go to the site and check the current price and yield information: Go to http://online.wsj.com/public/us, “Market
Given the following mortgage collateral and PAC: Mortgage collateral = $100,000,000 Weighted average coupon rate (WAC) = 7% Weighted average maturity (WAM) = 350 months Seasoning = 10 months
In your table, hide many of the rows and hide all columns except the ones for the period, the balance, interest, and principal for the collateral and each tranche, and the cash flows for the notional
Given the following sequential-pay CMO with a notional IO tranche formed from the MBS in Question 25: Tranche A receives all principal payments first from the collateral until its principal of $50
Given the following MBS: Mortgage collateral = $100,000,000 Weighted average coupon rate (WAC) = 6% Weighted average maturity (WAM) = 180 months Standard (100%) prepayment model Number of periods to
Using the MBS collateral program:a. Determine the values for the following yield analysis matrix for the PO and IO strip MBSs in Question 23.b. Given PSA speeds increase as rates decrease, determine
In your table, hide many of the rows and hide all columns except the ones for period, collateral balance, collateral interest, collateral principal, cash flow for PO strip, and cash flow for IO strip.
Using the MBS collateral Excel program, create an Excel table for a principalonly stripped MBS and interest-only stripped MBS formed from the MBS described in Question
Using the MBS collateral program, determine for the MBS in Question 21 the values and average lives for the following yield analysis matrix: Discount Rate/PSA 50 Value 5% 6% 7% 8% Average Life 150
Using the MBS collateral Excel program, create an Excel table for the following agency MBS. Mortgage collateral = $50,000,000 WAC = 7% PT rate = 6.5 WAM = 350 Seasoning = 10 PSA = 75%Note: In

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