Question 1 (20 Marks) Statement: If the bond market rallies further, HSU Asset Management may take profits, switching $8 million of 7 to 10-year US Treasury bonds for high-coupon single-A corporate bonds that are callable in two to four years according to DC, CIO of HSU. DC thinks a further rally is unlikely. So, HSU has already started to sell its 7 to 10-year US Treasury Bonds to buy $25 million of high-coupon, single-A nonbank financial bonds. This has lowered the HSU duration of its $160 million fixed income portfolio from 3.7 to 2.5 years, substantially lower than the 3.3-year duration of its benchmark portfolio because it thinks the bond rally has run its course. DC said he likes single-A nonbank financials that can get an attractive coupon levels ranging from 9.5%-10%. because these bonds are selling at wide spreads of about 100150 basis points off the benchmark yield of US Treasuries. From the description of the above statement, explain the following: (i) What is the purpose of selling the 7 to 10-year US Treasury Bonds? (4 Marks) (ii) Can you explain three purposes of buying high-coupon single-A corporate bonds that are callable in two to four years? (10 Marks) (iii) Can you describe the overall investment strategy that is pursued by HSU Asset Management? (6 Marks) Question 1 (20 Marks) Statement: If the bond market rallies further, HSU Asset Management may take profits, switching $8 million of 7 to 10-year US Treasury bonds for high-coupon single-A corporate bonds that are callable in two to four years according to DC, CIO of HSU. DC thinks a further rally is unlikely. So, HSU has already started to sell its 7 to 10-year US Treasury Bonds to buy $25 million of high-coupon, single-A nonbank financial bonds. This has lowered the HSU duration of its $160 million fixed income portfolio from 3.7 to 2.5 years, substantially lower than the 3.3-year duration of its benchmark portfolio because it thinks the bond rally has run its course. DC said he likes single-A nonbank financials that can get an attractive coupon levels ranging from 9.5%-10%. because these bonds are selling at wide spreads of about 100150 basis points off the benchmark yield of US Treasuries. From the description of the above statement, explain the following: (i) What is the purpose of selling the 7 to 10-year US Treasury Bonds? (4 Marks) (ii) Can you explain three purposes of buying high-coupon single-A corporate bonds that are callable in two to four years? (10 Marks) (iii) Can you describe the overall investment strategy that is pursued by HSU Asset Management? (6 Marks)
