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1. Go to the iShares website at, and look up information about the following;bond index funds;Barclays 1-3 Year Credit Bond Fund (CSJ);Barclays Intermediate Credit Bond Fund (CIU);iShares 10+ Year Credit Bond Fund (CLY);A. Complete the table below;Bond Fund;Duration;Average Yield to;Maturity;CSJ;CIU;CLY;B. Determine which of these three funds would be best for each of the following investors.;Explain your answers.;i. A very risk-averse investor;ii. An endowment fund expected to last in perpetuity;iii. An investor who tells you that they want as high a yield as possible consistent with an;average level of risk tolerance;c. Why must the yield to maturity be higher for funds with higher duration?;d. Compare the returns of the CSJ fund to the returns of the index that CSJ is based on.;Why would a difference exist? What is this difference called?;2. A fixed-income investor with a five-year time horizon has stated that he wants a guaranteed;rate of return regardless of any parallel shifts in market interest rates.;a. What is the name of the strategy that this investor should follow?;b. In constructing a portfolio for this investor, what is the most important variable to get;right, and what should the value of that variable be?;c. What will happen to the prices of the bonds in the portfolio if market interest rates rise?;Given this fact, what offsetting factor results in the guaranteed return?;3. An institutional investor has a $500,000 liability due at the end of each year for the next four;years. It would like to adopt a cash-matching strategy. The following bonds are available;4-year maturity with coupon 6%;1;3-year maturity with coupon 5%;2-year maturity with coupon 4%;1-year maturity with coupon 3%.;a. In the first step of the cash-matching strategy, which bond is purchased, and for what;principal amount?;b. Which bond is purchased next? Will the principal amount need to be the same? Explain.;(Explaining the remaining steps of the process is not required, but I will give you feedback if;you do.);4. A manager has $100 million to invest, plus an additional $200 million that is borrowed at 2%.;The manager puts all $300 million into an investment with a 5% rate of return.;a. Find the return on the $100 million of the managers funds.;b. Find the return, less interest expense, on the $200 million that is borrowed.;c. Find the managers total rate of return (in percent).;d. This manager has used borrowing to amplify returns. What is the name of this strategy?;5. Five types of derivatives are listed here;Binary credit option;Credit default swap;Currency forward contract;Interest rate futures contract;Interest rate swap;Which type of derivative should be used in the following situations? Use each derivative type;once and only once. Explain your answers.;a. A company wishes to convert its adjustable-rate liability into a fixed-rate liability.;b. An investor is certain that company XYZs bonds will be downgraded.;c. An investor owns a foreign bond and is concerned about changes in the exchange rate.;d. An investor owns bonds in company LMN, and wants to shift the risk of a credit event to;a different investor.;e. An investor thinks that market interest rates in general will fall.;2


Paper#26462 | Written in 18-Jul-2015

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