QUESTION $1[50$ MARKS$]$

With the increasing interest rate environment, many fixed income investors that

considered an Asset and Liability Management investment approach have been

severely impacted with a loss of value in their investment. As a Fixed Income Portfolio

Manager, you have been approached by one of your client to rebalance his exposure

for Fixed Income instruments.

The investor would like to reduce its exposure to some the underlying bonds and has

identified the bond issued by Texas Financial Services Ltd as an exit to the Fixed

Income Portfolio. The proposed date of settlement is scheduled on $31$st July $2023.$

Details of the bond is described as per below table $1.$

Table $1$: Details of Texas Financials Services Ltd Bond Maturity $15$ July $2029$

Annual Coupon $6\mathrm{.}5\%$

Coupon Payment Frequency Annual

Interest Payment Dates $15$ June and $15$ December

Maturity Date $15$ December $2029$

Day Count Convention $30/360$

Annual Yield$-$to$-$maturity $9\mathrm{.}5\%$

$($a$)$ Calculate the intrinsic value of the bond to be settled on $31$st July $2023$ closest

to and explain why the bond price is different from its nominal value?

$[10$ marks$]$

Based on a recent analyst report issued for the bond of Texas Financial Services Ltd$,$

the price of the bond is estimated at $94\mathrm{.}10$ and the settlement is $46$ days into a $183-$

day coupon period, using the actual$/$actual day$-$count convention, Compute the

following for the bond assuming a $100$ bps change in the yield$-$to$-$maturity and

investment of USD$5$M$.$:

$($b$)$ approximate effective duration;

$[10$ marks$]$

$($c$)$ the approximate Convexity;

$[5$ marks$]$

Page $3$ of $7$

$($d$)$ Dollar duration;

$[3$ marks$]$

$($e$)$ If the price is $96,$ what is the YTM on the bond investment.

$[8$ marks$]$

$($f$)$ Other than interest rate volatility, what other factors you will advise the investor

to consider in his decision making process for the sell down?

$[8$ marks$]$

$($g$)$ Critically explain under which circumstances it is not advisable for the investor

not to sell down the fixed income instruments despite rising interest rate

environment.

$[6$ marks$]$