Reference no: EM131250954
Question 1
Evaluate the following statements:
(a) If the future spot rates are expected to be lower than the current forward rates for the same maturities, bonds are most likely to be overvalued, according to the expectations hypothesis.
(b) Z-spread is the spread over the Treasury spot curve that a bond would trade at if it had no embedded option.
(c) If the binomial tree is correctly calibrated, it should give the same value for an optionfree bond as using the spot curve (par curve) used to calibrate the tree.
(d) If a firm's credit rating remains stable over time, the correlation its default probability over the business cycle would be reduced.
(e) Zero coupon bonds (ZCB) have duration equals to its maturity. Hence, ZCB's price sensitivity to interest rate change is the same regardless of the interest rates level.
Question 2
Contingent Immunisation Strategy is to invest in a bond such that:
• Its duration (Macaulay) matches the investment horizon, and
• Its present value matches the present value of the target value.
Given the current available return is 6%. The required terminal value (the target liability) is $2,054.46 over a 10-year investment horizon (based on yearly compounding).
Construct a bond that would immunise this target liability. Compute and verify your strategy indeed immunised the liability when the market interest rates are 3%, 6% and 9%.
Help: Use the following closed form for bond price and its Macaulay Duration.
Question 3
The structure of a collateralised debt obligation (CDO) is $800 million. It consists of 4 tranches:
The collateral under the structure consists of bonds with 10 years maturity and coupon 8%. Assuming there is no default in the collateral pool and ignoring all other fees and expenses, illustrate how to calculate the bond-equivalent yield and effective yield of the equity tranche,
given the 10-year Treasury rate is 4% and the LIBOR is 6.5%. (The coupons in the collateral and tranches are all semi-annually paid).
Question 4
Table A below is a simplified CMO structure with two sequential-pay tranches A and B.
Payments are made to Tranche A first then to Tranche B.
Payments from the underlying collateral (which has a pass-through coupon rate of 7.5%) for the first 5 months, as well as months 148 to 152 are shown in Table B. These payments include scheduled payments plus estimated prepayments based on 165% PSA prepayment
speed.
With the template provided, (a) Calculate the principal payments, ending balance, and interest payments to each tranche in the first five (5) months.
(b) Calculate the principal payments, ending balance, and interest payments to each tranche for month 148 to 152, given that at the beginning of the 148th month, there are still principal balance in Tranche A. Explain your calculation.
Question 5
Describe what securitisation is and the benefits of it .
See the attached file for full information.
Attachment:- Assignment-Fixed Income Securities.rar
Evaluate the given statements
: Evaluate the statements - If the future spot rates are expected to be lower than the current forward rates for the same maturities, bonds are most likely to be overvalued, according to the expectations hypothesis.
|
What do you consider the value of informal groups
: In class, we discussed the Health Leadership Competency Model. Using the model, describe what facet of leadership hospital administration lacks the most. Then describe what facet health administration does best. How would you suggest fixing the we..
|
Create a class rectangle with attributes length and width
: Exercise JHTP (Rectangle Class): Create a class Rectangle with attributes length and width, each of which defaults to 1. Provide methods that calculate the rectangle's perimeter and area. Use set and get methods for both length and width.
|
Pros and cons of a break-even analysis
: List and describe two pros (advantages) and two cons (disadvantages) of a break-even analysis. As future Heathcare Administrators, how would you use (utilize) break-even analysis within the workplace
|
Construct a bond that would immunise this target liability
: Construct a bond that would immunise this target liability. Compute and verify your strategy indeed immunised the liability when the market interest rates are 3%, 6% and 9%.
|
What is ellie saabs core business
: What is Ellie Saab's core business? Discuss the "total product view" - Complete a SWOT Analysis. What is Ellie Saab's competitive advantage?
|
Algebraic expression for her budget constraint
: Suppose an individual spends her income on goods X and Y. If her income is $200, the price of good X is PX= $4, and the price of good Y is PY= $2, then the algebraic expression for her budget constraint is:
|
Create a class called date that includes instance variable
: Create a class called Date that includes 3 instance variables-a month (type int), a day (type int), and a year (type int). Provide a constructor that initializes the 3 instance variables and assumes the values provided are correct.
|
Individuals budget constraint
: Suppose a consumer has an income of $30 that is spent on two goods: X and Y. The price of good X is $1.00 and the price of good Y is $3.00. Which of the following bundles of X and Y lie on the individuals budget constraint?
|