#1 I. ORIGINAL PORTFOLIO: BASE CASE Spreads where we are now today Market Spreads Base Case Spreads Spreads to UST Short-Term: AA 0.60% A BBB AA A BBB 0.85% 1.10% 0.60% 0.85% 1.10% Spread Changes AA A 0.00% 0.00% 0.00% BBB Spreads to UST Intermediate-Term: 0.70% 0.95% 1.20% 0.70% 0.95% 1.20% Spreads to UST Long-Term: 0.90% 1.15% 1.40% 0.90% 1.15% 1.40% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% II. Portfolio Issue Name Settlement Maturity Date Date Credit Rating Coupon Payment Payment UST Rate Frequency Basis Bench Spread to UST Yield Clean Last Price Coupon Next # of days # of days of days Coupon in Coupor from Last to Next Accrued Payment Payment Period to Settle Coupon Interest Full Price Par Amount Market Value UST Sho 4/10/2020 2/15/2022 UST Inter 4/10/2020 2/15/2027 UST Lon! 4/10/2020 2/15/2050 A B AAA AAA AAA 4/10/2020 2/15/2022 AA 4/10/2020 2/15/2022 AA 2.875% 3.000% 3.375% 2 1 2 1 2 1 2.890% 99.97101 2/15/2020 8/15/2020 182 3.050% 99.69066 2/15/2020 8/15/2020 182 3.360% 100.27835 2/15/2020 8/15/2020 182 55 127 55 55 3.375% 2 1 3.375% 2 1 C 4/10/2020 2/15/2022 A 3.625% 2 1 2.875% 0.600% 3.475% 99.81935 2/15/2020 8/15/2020 182 2.875% 0.600% 3.475% 99.81935 2/15/2020 8/15/2020 182 2.875% 0.850% 3.725% 99.81940 2/15/2020 8/15/2020 182 55 55 55 D 4/10/2020 2/15/2022 BBB 4.000% 2 1 2.875% 1.000% 3.875% 100.21693 2/15/2020 8/15/2020 182 55 127 127 127 127 127 127 E 4/10/2020 2/15/2027 AA 3.625% 2 1 F 4/10/2020 2/15/2027 AA 3.625% 2 1 G 4/10/2020 2/15/2027 A 3.875% 2 1 3.000% 0.700% 3.700% 99.54640 2/15/2020 8/15/2020 182 3.000% 0.700% 3.700% 99.54640 2/15/2020 8/15/2020 182 3.000% 0.950% 3.950% 99.54979 2/15/2020 8/15/2020 182 55 127 55 127 0.0043 99.9754 50,000,000 49,987,677 0.0045 99.6952 50,000,000 49,847,599 0.0051 100.2834 50,000,000 50,141,722 0.0051 99.8245 50,000,000 49,912,226 0.0051 99.8245 50,000,000 49,912,226 0.0055 99.8249 50,000,000 49,912,438 0.0060 100.2230 50,000,000 50,111,486 0.0055 99.5519 0.0055 99.5519 55 H 4/10/2020 2/15/2027 BBB 4.125% 2 1 I 4/10/2020 2/15/2050 AA 4.125% 2 1 J 4/10/2020 2/15/2050 AA 4.125% 2 1 3.000% 1.200% 4.200% 99.55309 2/15/2020 8/15/2020 182 3.375% 0.900% 4.275% 97.47933 2/15/2020 8/15/2020 182 3.375% 0.900% 4.275% 97.47933 2/15/2020 8/15/2020 182 55 55 55 K 4/10/2020 2/15/2050 A 4.375% 2 1 3.375% 1.150% 4.525% 97.55175 2/15/2020 8/15/2020 182 55 L 4/10/2020 2/15/2050 BBB 4.625% 2 1 3.375% 1.400% 4.775% 97.62096 2/15/2020 8/15/2020 182 55 127 127 127 127 127 127 50,000,000 49,775,938 50,000,000 49,775,938 0.0059 99.5556 50,000,000 49,777,820 0.0062 99.5593 50,000,000 49,779,662 0.0062 97.4856 50,000,000 48,742,783 0.0062 97.4856 50,000,000 48,742,783 0.0066 97.5584 50,000,000 48,779,178 0.0070 97.6279 50,000,000 48,813,974 Portfolio Total 750,000,000 744,013,451 #2 ORIGINAL PORTFOLIO: BASE CASE AFTER SPREADS CHANGE. I. Spreads Spreads to UST Short-Term: Spreads to UST Intermediate-Term: Spreads to UST Long-Term: Market Spreads AA A BBB 0.60% 0.85% 1.10% 0.70% 0.95% 1.20% 0.90% 1.15% 1.40% Base Case Spreads Spread Changes AA A BBB AA 0.60% 0.85% 1.10% 0.00% 0.70% 0.95% 1.20% 0.90% 1.15% 1.40% A BBB 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% II. Portfolio Issue Settlement Maturity Name Date Date Credit Rating Coupon Payment Payment UST Rate Frequency Basis Bench Spread to UST Yield Clean Last Price Coupon Payment Next # of days # of days # of days Coupon in Coupor from Last to Next Accrued Full Payment Period to Settle Coupon Interest Price Par Amount Market Value UST Sho 4/10/2020 2/15/2022 UST Inter 4/10/2020 2/15/2027 UST Lon! 4/10/2020 2/15/2050 AAA AAA AAA 2.875% 2 1 3.000% 2 1 3.375% 2 1 2.890% 99.97101 2/15/2020 8/15/2020 182 3.050% 99.69066 2/15/2020 8/15/2020 3.360% 100.27835 2/15/2020 8/15/2020 55 182 55 182 55 A 4/10/2020 2/15/2022 AA 3.375% 2 1 B 4/10/2020 2/15/2022 AA 3.375% 2 1 2.875% 0.600% 3.475% 99.81935 2/15/2020 8/15/2020 2.875% 0.600% 3.475% 99.81935 2/15/2020 8/15/2020 182 182 55 55 C 4/10/2020 2/15/2022 A 3.625% 2 1 2.875% 0.850% 3.725% 99.81940 2/15/2020 8/15/2020 182 55 D 4/10/2020 2/15/2022 BBB 4.000% 2 1 2.875% 1.000% 3.875% 100.21693 2/15/2020 8/15/2020 182 55 E 4/10/2020 2/15/2027 AA 3.625% 2 1 F 4/10/2020 2/15/2027 AA 3.625% 2 1 3.000% 0.700% 3.700% 99.54640 2/15/2020 8/15/2020 182 3.000% 0.700% 3.700% 99.54640 2/15/2020 8/15/2020 182 55 55 G 4/10/2020 2/15/2027 A 3.875% 2 1 H 4/10/2020 2/15/2027 BBB 4.125% 2 1 3.000% 0.950% 3.950% 99.54979 2/15/2020 8/15/2020 182 3.000% 1.200% 4.200% 99.55309 2/15/2020 8/15/2020 182 55 127 127 127 127 127 127 127 127 127 127 55 | 4/10/2020 2/15/2050 AA 4.125% 2 1 3.375% 0.900% 4.275% 97.47933 2/15/2020 8/15/2020 182 55 J 4/10/2020 2/15/2050 AA 4.125% 2 1 3.375% 0.900% 4.275% 97.47933 2/15/2020 8/15/2020 182 55 K 4/10/2020 2/15/2050 A 4.375% 2 1 3.375% 1.150% 4.525% 97.55175 2/15/2020 8/15/2020 182 55 L 4/10/2020 2/15/2050 BBB 4.625% 2 1 3.375% 1.400% 4.775% 97.62096 2/15/2020 8/15/2020 182 55 127 127 127 127 127 0.0043 99.9754 50,000,000 49,987,677 0.0045 99.6952 50,000,000 49,847,599 0.0051 100.2834 50,000,000 50,141,722 0.0051 99.8245 50,000,000 49,912,226 0.0051 99.8245 50,000,000 49,912,226 0.0055 99.8249 50,000,000 49,912,438 0.0060 100.2230 50,000,000 50,111,486 0.0055 99.5519 50,000,000 49,775,938 0.0055 99.5519 50,000,000 49,775,938 0.0059 99.5556 50,000,000 49,777,820 0.0062 99.5593 50,000,000 49,779,662 0.0062 97.4856 50,000,000 48,742,783 0.0062 97.4856 50,000,000 48,742,783 0.0066 97.5584 50,000,000 48,779,178 0.0070 97.6279 50,000,000 48,813,974 Portfolio Total 750,000,000 744,013,451 #3 ORIGINAL PORTFOLIO WITH NEW ASSET ALLOCATION: BEFORE SPREADS CHANGE. I. Spreads Market AA Spreads A BBB Spreads to UST Short-Term: 0.60% 0.85% 1.10% Spreads to UST Intermediate-Term: 0.70% Spreads to UST Long-Term: 0.95% 1.20% 0.90% 1.15% 1.40% Base Case Spreads AA A BBB 0.60% 0.85% 1.10% 0.70% 0.95% 1.20% 0.90% 1.15% 1.40% Spread Changes AA 0.00% 0.00% A BBB 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% II. Portfolio Issue Settlement Maturity Credit Name Date Date Rating Coupon Payment Payment Rate Frequency Basis UST Bench Spread to UST Yield Clean Last Price Coupon Payment Next # of days # of days # of days Coupon in Coupor from Last to Next Accrued Payment Period to Settle Coupon Interest Full Price Par Amount Market Value B UST Sho 4/10/2020 2/15/2022 AAA UST Inter 4/10/2020 2/15/2027 AAA UST Lon! 4/10/2020 2/15/2050 AAA A 4/10/2020 2/15/2022 AA 4/10/2020 2/15/2022 AA 2.875% 2 1 3.000% 2 1 3.375% 2 1 2.890% 99.97101 2/15/2020 8/15/2020 182 3.050% 99.69066 2/15/2020 8/15/2020 182 3.360% 100.27835 2/15/2020 8/15/2020 182 55 55 55 3.375% 2 1 3.375% 2 1 C 4/10/2020 2/15/2022 A 3.625% 2 1 D 4/10/2020 2/15/2022 BBB 4.000% 2 1 E 4/10/2020 2/15/2027 AA 3.625% 2 1 F 4/10/2020 2/15/2027 AA 3.625% 2 1 G 4/10/2020 2/15/2027 A 3.875% 2 1 H 4/10/2020 2/15/2027 BBB 4.125% 2 1 2.875% 0.600% 3.475% 99.81935 2/15/2020 8/15/2020 182 2.875% 0.600% 3.475% 99.81935 2/15/2020 8/15/2020 182 2.875% 0.850% 3.725% 99.81940 2/15/2020 8/15/2020 182 2.875% 1.000% 3.875% 100.21693 2/15/2020 8/15/2020 182 3.000% 0.700% 3.700% 99.54640 2/15/2020 8/15/2020 182 3.000% 0.700% 3.700% 99.54640 2/15/2020 8/15/2020 182 3.000% 0.950% 3.950% 99.54979 2/15/2020 8/15/2020 182 3.000% 1.200% 4.200% 99.55309 2/15/2020 8/15/2020 182 55 55 55 55 55 55 55 55 4/10/2020 2/15/2050 AA 4.125% 2 1 3.375% 0.900% 4.275% 97.47933 2/15/2020 8/15/2020 182 55 J 4/10/2020 2/15/2050 AA 4.125% 2 1 K 4/10/2020 2/15/2050 A 4.375% 2 1 3.375% 0.900% 4.275% 97.47933 2/15/2020 8/15/2020 3.375% 182 55 L 4/10/2020 2/15/2050 BBB 4.625% 2 1 1.150% 4.525% 3.375% 1.400% 4.775% 97.62096 2/15/2020 8/15/2020 97.55175 2/15/2020 8/15/2020 182 55 182 55 127 127 127 127 127 127 127 127 127 127 127 127 127 127 127 0.0043 99.9754 50,000,000 49,987,677 0.0045 99.6952 50,000,000 49,847,599 0.0051 100.2834 50,000,000 50,141,722 0.0051 99.8245 50,000,000 49,912,226 0.0051 99.8245 50,000,000 49,912,226 0.0055 99.8249 50,000,000 49,912,438 0.0060 100.2230 50,000,000 50,111,486 0.0055 99.5519 50,000,000 49,775,938 0.0055 99.5519 50,000,000 49,775,938 0.0059 99.5556 50,000,000 49,777,820 0.0062 99.5593 50,000,000 49,779,662 0.0062 97.4856 50,000,000 48,742,783 0.0062 97.4856 50,000,000 48,742,783 0.0066 97.5584 50,000,000 48,779,178 0.0070 97.6279 50,000,000 48,813,974 Portfolio Total 750,000,000 744,013,451 #4 ORIGINAL PORTFOLIO WITH NEW ASSET ALLOCATION: AFTER SPREADS CHANGE. Portfolio Total 750,000,000 744,013,451 I. Spreads Spreads to UST Short-Term: Spreads to UST Intermediate-Term: Market Spreads AA A BBB 0.60% 0.85% 1.10% 0.70% 0.95% 1.20% Base Case AA 0.60% 0.85% A Spreads BBB 1.10% 0.70% 0.95% Spreads to UST Long-Term: 0.90% 1.15% 1.40% 0.90% 1.15% 1.20% 1.40% Spread Changes AA A BBB 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% II. Portfolio Issue Name Settlement Maturity Credit Date Date Rating Coupon Payment Payment UST Rate Frequency Basis Bench Spread to UST Yield Clean Last Price Coupon Payment Next # of days # of days # of days Coupon in Coupor from Last to Next Accrued Payment Period to Settle Coupon Interest Price Full Par Amount Market Value UST Sho 4/10/2020 2/15/2022 AAA UST Inter 4/10/2020 2/15/2027 AAA UST Lon 4/10/2020 2/15/2050 AAA 2.875% 2 1 3.000% 2 1 3.375% 2 1 2.890% 99.97101 2/15/2020 8/15/2020 182 3.050% 99.69066 2/15/2020 8/15/2020 182 3.360% 100.27835 2/15/2020 8/15/2020 182 55 55 55 A 4/10/2020 2/15/2022 AA 3.375% 2 1 B 4/10/2020 2/15/2022 AA 3.375% 2 1 2.875% 0.600% 3.475% 99.81935 2/15/2020 8/15/2020 182 2.875% 0.600% 3.475% 99.81935 2/15/2020 8/15/2020 182 55 127 127 127 127 55 C 4/10/2020 2/15/2022 A 3.625% 2 1 2.875% 0.850% 3.725% 99.81940 2/15/2020 8/15/2020 182 55 D 4/10/2020 2/15/2022 BBB 4.000% 2 1 E 4/10/2020 2/15/2027 AA 3.625% 2 1 F 4/10/2020 2/15/2027 AA 3.625% 2 1 G 4/10/2020 2/15/2027 A 3.875% 2 1 2.875% 1.000% 3.875% 100.21693 2/15/2020 8/15/2020 182 3.000% 0.700% 3.700% 99.54640 2/15/2020 8/15/2020 182 3.000% 0.700% 3.700% 99.54640 2/15/2020 8/15/2020 182 3.000% 0.950% 3.950% 99.54979 2/15/2020 8/15/2020 182 55 55 55 55 H 4/10/2020 2/15/2027 BBB 4.125% 2 1 || 4/10/2020 2/15/2050 AA 4.125% 2 1 J 4/10/2020 2/15/2050 AA 4.125% 2 1 3.000% 1.200% 4.200% 99.55309 2/15/2020 8/15/2020 182 3.375% 0.900% 4.275% 97.47933 2/15/2020 8/15/2020 182 3.375% 0.900% 4.275% 97.47933 2/15/2020 8/15/2020 182 55 55 55 K 4/10/2020 2/15/2050 A 4.375% 2 1 3.375% 1.150% 4.525% 97.55175 2/15/2020 8/15/2020 182 55 127 127 127 127 127 127 127 127 127 127 L 4/10/2020 2/15/2050 BBB 4.625% 2 1 3.375% 1.400% 4.775% 97.62096 2/15/2020 8/15/2020 182 55 127 0.0043 99.9754 50,000,000 49,987,677 0.0045 99.6952 50,000,000 49,847,599 0.0051 100.2834 50,000,000 50,141,722 0.0051 99.8245 50,000,000 49,912,226 0.0051 99.8245 50,000,000 49,912,226 0.0055 99.8249 50,000,000 49,912,438 0.0060 100.2230 50,000,000 50,111,486 0.0055 99.5519 50,000,000 49,775,938 0.0055 99.5519 50,000,000 49,775,938 0.0059 99.5556 50,000,000 49,777,820 0.0062 99.5593 50,000,000 49,779,662 0.0062 97.4856 50,000,000 48,742,783 0.0062 97.4856 50,000,000 48,742,783 0.0066 97.5584 50,000,000 48,779,178 0.0070 97.6279 50,000,000 48,813,974 Portfolio Total 750,000,000 744,013,451 Your Assignment. Part 1.) You are a portfolio manager for Vandelay Capital Management's Investment Grade Bond Fund. You've been pondering the Investment Clock for a few days, and you now believe that the "time" is 8:30. The Investment Clock is posted on Blackboard. a.) Change the Quality Spread Matrix in Case #2 to reflect your views. Explain why you changed the spread matrix the way you did. The key parts of this problem involve Cases #3 and #4. You want to change your porfolio to reflect your views that quality spreads will soon change. Remember: No guts, no glory. b.) Change your asset allocation by adjusting Case #3. You can do this in two ways. The first is: adjust the par amounts, i.e., change the equal par weighting. The second way is: choose the portfolio duration and portfolio convexity you want. Then use Solver to find the asset weights that attain your portfolio objectives. Explain why you changed the portfolio as you did. c.) Then take the weights from Case #3 and enter them into Case #4. Then change the quality spread matrix for Case #4, just as you did in Case #2. d.) Compare portfolio duration and portfolio convexity for Cases #1 and #3. Then compare portfolio duration and portfolio convexity for Cases #2 and #4. How much did your aggressive portfolio reallocation make for your clients? Part 2.) Bonds A through L are non-Treasury fixed income securities, but, other than that information, they are not defined. Suppose that bonds A, B, E, F, I and J are callable Corporate bonds, and the call price for each bond is par. And suppose that bonds C, D, G, H, K, and L are Agency Residential MBS. a.) What are the issues here that you, as the portfolio manager, must deal with to position your fund to take advantage of your insight that the time is 8:30? Provide some detail for your answer to this question. No calculations are required for Part 2. One final point about the entire project: Remember, what I am always interested in is thoughtfulness. Just getting a correct numerical answer is not your only objective. Write a project that shows me you have thought about these questions and the issues surrounding solving them. Good Luck. All your answers must be typed and double spaced.