Question

An FI has a $100 million portfolio of six-year Eurodollar
bonds that have an 8 percent coupon. The bonds are trading at par
and have a duration of five years. The FI wishes to hedge the
portfolio with T-bond options that have a delta of –0.625. The
underlying long-term Treasury bonds for the option have a duration
of 10.1 years and trade at a market value of $96,157 per $100,000
of par value. Each put option has a premium of 3.25 (percent of
$100,000). (LG 23-4)

A) How many bond put options are necessary to hedge the bond
portfolio?

B) If interest rates increase 100 basis points, what is the
expected gain or loss on the put option hedge?

C) What is the expected change in market value on the bond
portfolio?

D) How far must interest rates move before the payoff on the
hedge will exactly offset the cost of placing the hedge?

E) How far must interest rates move before the gain on the
bond portfolio will exactly offset the cost of placing the
hedge?

Answer #1

An FI has a $230 million asset portfolio that has an average
duration of 6.8 years. The average duration of its $190 million in
liabilities is 4.3 years. Assets and liabilities are yielding 10
percent. The FI uses put options on T-bonds to hedge against
unexpected interest rate increases. The average delta (?) of the
put options has been estimated at ?0.3 and the average duration of
the T-bonds is 7.3 years. The current market value of the T-bonds
is...

MLK Bank has an asset portfolio that consists of $100 million of
30-year bonds with 8 percent coupon rate (coupons are paid
annually) and $1,000 face value selling at par.
a) What will be the bonds’ new prices if market yields change
immediately by ± 0.05 percent? What will be the new prices if
market yields change immediately by ± 1.00 percent?
b) The duration of these bonds is 12.1608 years. What are the
predicted new bond prices in each...

It is April, Farmers, Inc. will issue $10 million in 5-year
bonds at par in
August. Coupon payments are made every six months and mature
value is $1,000 per
bond. Current interest rate is 6% for the 5-year issue. But
given the recent increases in
Federal Reserve rates, IFI is worried interest rate will
increase by 0.50% by August.
Currently, August T-bond (semi-annual coupon rate is 5%) futures
are 108'18.
(a) At an interest rate of 6.50%, how much will...

There are a number of ways to construct bond hedge ratios. One
way to write a duration-based hedge ratio is as follows:
Hedge Ratio = CFctd X
(Pb X Db)/ (Pf X Df )
where
CF = conversion factor for CTD
bond
Pb = price of bond
portfolio as percentage of par
Db = duration of bond
portfolio
Pf = price of futures
contract as percentage of 100%
Df = duration of CTD bond
for futures contract
A bond portfolio...

Two bonds have the following
terms:
Bond A
Principal
$1,000
Coupon
8%
Maturity
10
years
Bond B
Principal
$1,000
Coupon
7.6%
Maturity
10
years
Bond B has an additional feature: It
may be redeemed at par after five years (i.e., it has a put
feature). Both bonds were initially sold for their face amounts
(i.e., $1,000).
If interest rates fall to 7 percent, what will be the price of
each bond?
If interest rates rise to 9 percent,
what will...

Sun Bank has six-year zero coupon bonds with a total face value
of $20 million. The current market yield on the bonds us 10%.
A) what is the modified duration of these bonds?
B) what is the price volatility if the max potential adverse move
in yields is estimated at 20 basis points?
C) what is the daily earnings at risk of this bond portfolio?
d) what is the 10-day VAR assuming the daily returns are
independently distributed?

Insook, Inc., and Hankyu Corp. both have 7 percent coupon bonds
outstanding, with semi-annual interest payments, and both are
prices at par value. The Insook, Inc. bond has 2 years to maturity,
whereas the Hankyu Corp. bond has 5 years to maturity.
a. If the interest rates suddenly rise by 2 percent, what is the
price of Insook, and Hankyu’s bonds respectively?
b. What is the Macaulay duration of Insook, and Hankyu’s bonds
respectively if the interest rates increase by...

Insook, Inc., and Hankyu Corp. both have 7 percent coupon bonds
outstanding, with semi-annual interest payments, and both are
prices at par value. The Insook, Inc. bond has 2 years to maturity,
whereas the Hankyu Corp. bond has 5 years to maturity.
a) If the interest rates suddenly rise by 2 percent, what is the
price of Insook, and Hankyu’s bonds respectively? (3 points)
b) What is the Macaulay duration of Insook, and Hankyu’s bonds
respectively if the interest rates...

An investor has two bonds in his portfolio that have a face
value of $1,000 and pay a 10% annual coupon. Bond L matures in 17
years, while Bond S matures in 1 year.
a. What will the value of the Bond L be if the going interest
rate is 7%, 8%, and 11%? Assume that only one more interest payment
is to be made on Bond S at its maturity and that 17 more payments
are to be made...

An investor has two bonds in his portfolio that have a face
value of $1,000 and pay a 12% annual coupon. Bond L matures in 20
years, while Bond S matures in 1 year.
A. What will the value of the Bond L be if the going interest
rate is 7%, 8%, and 13%? Assume that only one more interest payment
is to be made on Bond S at its maturity and that 20 more payments
are to be made...

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 43 minutes ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 2 hours ago

asked 2 hours ago

asked 2 hours ago

asked 3 hours ago

asked 3 hours ago