(Questions are in bold print followed by answers.)

2. What is meant by a mortgage-backed security?

A mortgage-backed security is a security backed by one or more mortgage loans. Like a bond that is callable, a mortgage-backed security allows the investor to grant the borrower an option.

4. What is the cash flow of a 10-year bond that pays coupon interest semiannually, has a coupon rate of 7%, and has a par value of $100,000?

The principal or par value of a bond is the amount that the issuer agrees to repay the bondholder at the maturity date. The coupon rate multiplied by the principal of the bond provides the dollar amount of the coupon (or annual amount of the interest payment). A 10-year bond with a 7% annual coupon rate and a principal of $100,000 will pay semiannual interest of (0.07/2)($100,000) = $3,500 for 10(2) = 20 periods. Thus, the cash flow is $3,500. In addition to this periodic cash, the issuer of the bond is obligated to pay back the principal of $100,000 at the time the last $3,500 is paid.

6. Give three reasons why the maturity of a bond is important.

There are three reasons why the term to maturity of a bond is important. First, the term to maturity indicates the time period over which the holder of the bond can expect to receive the coupon payments and the number of years before the principal will be paid in full. Second, the term to maturity is important because the yield on a bond depends on it. The shape of the yield curve determines how the term to maturity affects the yield. Third, the price of a bond will fluctuate over its life as yields in the market change. The volatility of a bond’s price is dependent on its maturity. More specifically, with all other factors constant, the longer the maturity of a bond, the greater the price volatility resulting from a change in market yields.

8. Explain whether or not an investor can determine today what the cash flow of a...

...fi
Unit of Study Outline
Unit code FINC 3019
Unit title FixedIncomeSecurities
Semester 1, 2012
Pre-requisite units: (FINC2012 or FINC2002) or (FINC2013 or FINC2003) or (FINC2014 or FINC2004)
Co-requisite units: N/A
Assumed Knowledge and/or skills: The unit builds on the material on asset pricing, capital structure and financial valuation studied in the first year finance unit. Knowledge of derivatives is desirable but not essential.
Unit coordinator: Dr Juan Yao
Room: Merewether 458
Email address: juan.yao@sydney.edu.au
Phone: 93517650
Consultation Hours: Thursday 15:00-16:00
Class day(s): Thursday, time: 13:00-15:00 and venue: Peter Nicol Russell Lecture Theatre
Required Text / Resources: Fabozzi F.J. (2007) Bond Markets, Analysis and Strategies (7th Edition), Pearson Education.
-------------------------------------------------
This Guide to Unit Learning Content and Assessment MUST be read in conjunction with the Guide to Business School Student Administration Manual (sydney.edu.au/business/currentstudents/student_information/student_administration_manual) and University Policies on Academic Honesty, Special Consideration, and all applicable policies that apply to every unit of study offered by the Business School (http://sydney.edu.au/business/currentstudents/policy) . In determining applications and appeals relating to these matters it will be assumed that every student has taken the time...

...FINA0804/2323 FixedIncomeSecurities
Dr. Huiyan Qiu
Homework Assignment #1
Due: February 17, Monday, drop in TA’s box by 6PM
Unless explicitly specified, bond pays coupon interest semi-annually.
1. (a) Provide the list of currently outstanding Government Bonds in Hong Kong.
Information should include at least the maturity date, the coupon rate, and the size of
each bond. (b) Describe the most recent Hong Kong Government Bond issuance under
the Institutional Bond Issuance Programme.
2.
The portfolio manager of a tax-exempt fund is considering investing $500,000 in a
zero-coupon debt instrument that pays an annual interest rate of 5.7% for four years.
At the end of four years, the portfolio manager plans to reinvest the proceeds for
three more years and expects that for the three-year period, an annual interest rate
of 7.2% can be earned. What is the expected future value of this investment?
Assume all rates are compounded annually.
(b) Suppose that the portfolio manager in the above question has the opportunity to
invest the $500,000 for seven years in a zero-coupon debt obligation that promises
to pay an annual interest rate of 6.1%, compounded semiannually. Is this investment
alternative more attractive than the one above?
(a)
3. Consider a bond with $1,000 par value and coupon rate of 5%. The bond has 2.15 years
remaining until maturity. Suppose the discount rate is 6.5%. Calculate the accrued...

...FixedIncomeSecurities
Chapter 2 Basics of FixedIncomeSecurities
Problem Set
(light version of the exercises in the text)
Q3.
You are given the following data on diﬀerent rates with the same maturity (1.5
years), but quoted on a diﬀerent basis and diﬀerent compounding frequencies:
• Continuously compounded rate: 2.00% annualized rate
• Continuously compounded return on maturity: 3.00%
• Annually compounded rate: 2.10% annualized rate
• Semi-annually compounded rate: 2.01% annualized rate
You want to ﬁnd an arbitrage opportunity among these rates. Is there any one that
seems to be mispriced?
Answer: This exercise tests your knowledge of dealing with interest rates with diﬀerent
compounding frequency.
Given the interest rates, we can compute the discount factors correspondingly.
From continuously compounded rate: 2.00% annualized rate:
Z (0, 1.5) = exp (−r (0, 1.5) × (T − t))
= exp (−0.02 × 1.5) = 0.970 45
From continuously compounded return on maturity: 3.00% (we did not cover this in
class, but it means the unannualized interest rate)
Z (0, 1.5) = exp (−0.03) = 0.970 45
From annually compounded rate: 2.10% annualized rate:
Z (0, 1.5) =
1
(T −t)
(1 + r1 (0, 1.5))
=
1
= 0.969 307 08
(1 + 0.021)1.5
From semi-annually compounded rate: 2.01% annualized rate,
1
Z (0, 1.5) =
1+
r2 (0,1.5)
2
2×(T −t)
1
=
1+
0.0201 2×1.5
2
= 0.970...

...I. Data
II. Descriptive statistics
Table 1: General statistics
TSYCVSPD
OAS
COUPON
PRICE
Mean
109.4131
112.0281
4.424037
109.3066
Median
100.05
103
4.5
105.936
Maximum
1104.5
1108
12.75
173.5
Minimum
-84.5
-127
0
40.98
Standard Deviation
74.90148
79.00204
1.973621
11.29507
In this table we can see that there is a little bit difference when compare the treasury security yield curve spread and option adjusted spread.
Figure 1: Industry Distribution
According to the chart we can see that the data we obtained concentrate on the industrial and financial industry, while mostly industrial. The rest are utility, treasury, mortgage, agency and World Bank. (In sequential order)
Figure 2: Rating Distribution
The data we use has the rating from AAA to BB, from the distribution we can tell the majority of the company we chose are A and BBB which is quite reasonable since they are above the average and the analysis result won’t be extremely high or low.
Table 2: Average Yield Spread to Treasury
Rating
AAA
AA
A
BBB
BB
Total
28.25101
50.71882
96.1955
150.004
280.6011
Maturity > 10 years
84.2
79.43144
138.9689
199.563
303.037
Callable
97.525
119.0917
121.5084
186.6647
358.1
May call or non-callable
81.97917
78.16569
145.39
205.0435
298.632
Maturity ≤ 10 years
21.09772
36.74078
75.46772
130.7933
270.9857
Callable
52.975
72.45357
82.46609
147.638
313.0857
May call or non-callable
20.50465
35.44044
73.47725
121.637
258.9571
Table...

...FNCE 4820 Fall 2013 NAME__________________
David M. Gross, Ph.D.
Midterm 1 with Answers
Answer the questions in the space below. Written answer requires no more than a few sentences.
Show your work to receive partial credit. Points are as indicated.
1. (9 Points) Briefly define the following in the context of holding a bond.
(a) Interest-Rate Risk
Risk of price change due to changes in the bond’s yield.
(b) Inflation Risk
Risk of earning a lower-than-expected real return if inflation exceeds expectations.
(c) Liquidity Risk
The risk of a large price drop if the bond must be sold quickly or the inability to sell quickly without incurring a large price drop.
Note: Liquidity Risk can also refer to the inability of a portfolio manager to determine the “correct” market value for a bond (for mark-to-market purposes) due to infrequent trading of the bond.
2. (7 Points) Answer the following questions about embedded conversion options in bonds.
(a) To which party (the borrower or the lender) is a conversion option granted?
The lender is granted the convert option.
(b) Why might the party granted the option exercise the convert option?
A convert option allows the holder of the bond to give up the bond and get common stock (convert the bond into stock) at a pre-set price per share. The holder would do this if the market price of the stock (far) exceeds the pre-set price.
(c) All else equal, will the inclusion of a convert option increase or decrease...

...Name: 李耀倫
Student No: 0809853A-B011-2996
FixedIncomeSecurities 1
7. A pension fund manager knows that the following liabilities must be satisfied:
Years from Now Liability (in millions)
|Years From Now |Liability (in millions) |
|1 |$2.0 |
|2 |$3.0 |
|3 |$5.4 |
|4 |$5.8 |
Suppose that the pension fund manager wants to invest a sum of money that will satisfy this liability stream. Assuming that any amount that can be invested today can earn an annual interest rate of 7.6%, how much must be invested today to satisfy this liability stream?
One’s liability:
PV0 = 2,000,000 * [1 / (1 + 7.6%) ^1] = 2,000,000 * 0.9294 = $ 1,858,736.06
Two’s liability:
PV0 = 3,000,000 * [1 / (1 +7.6%) ^2] = 3,000,000 * 0.8637 = $ 2,591,174.8
Three’s liability:
PV0 = 5,400,000 * [1/ (1 + 7.6%) ^3] = 5,400,000 * 0.8027 = $ 4,334,679.04
Four’s liability:
PV0 = 5,800,000 * [1 / (1 + 7.6%) ^4] =...

...Income Support Policies
OCT 19, 2012
INCOME SUPPORT 2
Income Support Policies
Today too many hardworking Americans are not making enough money to get by
and are suffering drastically to make an honest living. Do to the collapse of the economy
millions of people have lost their homes, jobs, and even their retirement savings. Many
Americans are working low-wage jobs paying minimum wage and are living way below
the poverty line. With the cost of living going up and minimum wage at a stand still, many
have resorted to government aid such as income support. “Income support is extra money
for those with a low income or none at all, who are working less than a certain amount of
hours a week and have not signed on as unemployment” (webstersdictionary.com, 2008).
Programs such as “Temporary Assistance For Needy Families” (TANF), “Supplemental
SecurityIncome” (SSI), and “Social Security” are benefits that provide income to those in
need in order to maintain a moral and healthy life style.
“Temporary Assistance For Needy Families is the means-tested federal income
program for dependent children under 18 and their adult...

...6 billion.
The fixedincome arbitrage strategy is a broad set of marketneutral investment strategies intended to exploit valuation
differences between various fixedincome securities or contracts. These are the most widely used fixedincome
arbitrage strategies in the market: Swap spread arbitrage (SS), Yield curve arbitrage (YC), Mortgage arbitrage (MA),
Volatility arbitrage (VA), and Capital Structure arbitrage (CS). For purposes of this report we will focus on SS and YC
arbitrage.
The Yield Curve Arbitrage strategy includes taking advantage of small mispricings within the yield curve through the
use of Intellectual Capital, gathered through sophisticated Factor Models. The Yield Curve is assembled with Market
Data regarding yields at different maturities. Investors use the Yield Curve to extract implied information concerning
Forward and Swap rates as well. Arbitrageurs, through the factor models, identify mispricings along the curve and
exploit them in the following way:
Once an actionable mispricing is identified, Arbitrageurs engage in swaps, either long or short, with the hopes to profit
before the market converges or before the swap expires. For example, if the three year market yield is identified as
being too high, a trader will go long in a swap trade and lock in the fixed market rate, with the hopes that her variable ...