Câu 12: CFA Level 3

Toni Morrison, CFA, a manager for Sierra Fund, is investigating the use of relative value methodologies for global corporate bond portfolio management. As a recent college graduate, Bernard Tabler has been assisting Morrison in data gathering and analysis. Morrison is a firm believer that corporate yield spreads have a tendency to revert to their historical mean values. Accordingly, Tabler has compiled relevant information for three corporate issues. Morrison and Tabler use the information below to conduct mean reversion analysis. Note: All spreads are expressed in basis points.Morrison's research has also included a study of the implications of secular and cyclical changes in the primary corporate bond market. As a result of her research, she states that the implication of both cyclical and secular changes in the primary corporate bond market for fixed-income portfolio management is that effective duration and aggregate interest rate risk will increase. Tabler adds that it also appears that credit-based derivatives will increasingly be used to achieve desired exposure to credit sectors, issuers, and structures. During the presentation to a client, Morrison discusses corporate curve analysis. He states that corporate spread curves tend to change with the economic cycle, so in order to properly conduct this analysis the analyst must examine credit and yield curves carefully. Tabler adds that corporate spreads usually narrow during upturns and widen during downturns. Morrison is also considering using repurchase agreements to fund some overnight investment activities. Watching the financial news, she observes that theFederal Reserve has increased the federal funds rate to combat potential inflation. She notes that this will increase the borrowing costs of investment strategies using repurchase agreements. Tabler chimes in that the strategy's interest cost could be reduced by using hot collateral such as on-the-run U.S. Treasuries. Morrison is also providing advice to a client on the best way to hedge a floating rate loan using a swap. The client is paying 120 basis points over LIBOR. Morrison suggests that the client enter a 5-year LIBOR-based swap. The swap fixed rate is 100 basis points over the U.S. Treasury rate. The floating rate is LIBOR flat. LIBOR is 5.60% and the Treasury rate is 5.20% when this swap is being considered. Over lunch Morrison and Tabler get into a heated debate over the relative performance of callable and non-callable bonds in a dynamic interest rate environment. In terms of relative performance, determine which of the following relationships is least correct.

1. A. If rates are significantly greater than coupon rates, embedded call options are practically worthless, so callable bonds perform as if they are non-callable.
2. B. As interest rates increase, the option to call a callable bond decreases. If required returns are below coupon rates and expected to increase, therefore, non- callable bonds are probably better investments than callable bonds. — đáp án hiện tại
3. C. The value of a callable bond is significantly affected by the value of the embedded call option. For example, as its required return falls below (increases above) its coupon rate, the value of the embedded option consumes an increasing (a decreasing) proportion of the total value of the bond.