30 Questions
What is the Macaulay duration of the barbell portfolio?
Six years
What happens to the short-term yields in the steepening twist scenario?
They go down
What is the effect of the steepening twist on the value of the barbell portfolio?
It decreases
What is the maturity of the zero-coupon bond that provides perfect immunization?
Six years
What happens to the six-year yields in the scenario depicted in Exhibit 11?
They go down
What is the composition of the immunizing portfolio with a 'barbell' structure?
Half short-term bonds and half long-term bonds
Why would a homeowner elect to prepay their mortgage?
To take advantage of refinancing opportunities if interest rates decrease
What type of asset is a fixed-rate government bond?
Type I asset
What is the primary source of uncertainty in demand and time deposits from a savings bank's perspective?
The timing of the deposit redemption
What type of liability is a contingent convertible bond?
Type IV liability
What is the primary goal of liability-driven investing in most circumstances?
To manage the interest rate risk of multiple liabilities
What is the effect of a decline in home prices on the default risk of mortgages?
It increases the default risk, especially for mortgages with higher loan-to-value ratios
What is the primary requirement for the bond portfolio's initial market value to achieve interest rate immunization?
Its present value should match or exceed the present value of the zero-coupon bond
What is the relationship between the Macaulay duration of the zero-coupon bond and the investment horizon?
The Macaulay duration is always equal to the investment horizon
What is the condition required for immunization to be achieved?
Any change in the cash flow yield on the bond portfolio is equal to the change in the yield to maturity on the zero-coupon bond
What is the periodicity of the annual percentage rate in the cash flow yield?
Two
What is the effect of a parallel shift in the yield curve on the bond portfolio's immunization?
It ensures immunization is achieved
Why is it wrong to recommend Portfolio B solely based on its higher yield and closer duration to the investment horizon?
Because the difference in yield is not likely to be significant
What is the desirable property of fixed-income bonds, all else being equal?
Higher convexity
What is the expected outcome at the end of the investment horizon if immunization is achieved?
The bond portfolio's market value will meet or exceed the zero-coupon bond's face value
What is the conclusion that can be drawn about the bond portfolio's market value at the end of the investment horizon?
It will be close to the change in the market value of the zero-coupon bond
What is the client's objective, according to the text?
To minimize the variance in the realized rate of return
Why is Portfolio A recommended over Portfolio B?
Because of its higher convexity
What is the significance of the difference in convexity between the two portfolios?
It is meaningful
What is an implication of implementing the duration-matching strategy at a lower cost?
Investing in less expensive investment-grade bonds
What is the primary reason for choosing Portfolio B over Portfolio A?
Portfolio B has a lower convexity than Portfolio A
What is the goal of immunizing multiple liabilities in a portfolio?
To minimize the structural risk to the strategy
What is the difference between cash flow matching and duration-matching strategies?
Cash flow matching involves buying more expensive government bonds, while duration-matching involves buying less expensive investment-grade bonds
What is the characteristic of a zero-coupon bond that makes it a perfect immunization instrument?
It has a zero dispersion of cash flows
What is the consequence of an immunizing portfolio having a higher convexity than the liabilities?
It increases the structural risk to the strategy
Learn about the importance of prepayment models in mortgage financing, including the impact of interest rates and default risk on cash flow projections. Understand how loan-to-value ratios affect default risk and how to assess the quality of mortgages.
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