Fixed Income Portfolio Management

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You are a portfolio manager running a fixed income portfolio all of one bond. The bond is XYZ bond with a YTM of 5%, coupon 8%, term 6 years semiannual, BBB credit rating. The reinvestment rate assumption is 3%.

You have a $500M pension liability with a duration of 8 years.

Two derivative instruments available are:

Tbond futures, priced at 97 with a duration of 3 and
Interest rate swaps with a duration of 3.
Calculate the bond duration.
Calculate the # of bonds needed to fund the liability.
Explain the conditions to immunize the portfolio using a classical duration-match immunization.
Provide the number of Tbond contracts.
If the reinvestment rate falls from 3% to 1%, provide the projected deficit.
Provide the NP (notional principal of Interest Rate Swaps to hedge)
Prove that the futures gain will > the loss attributed to the deficit.
Prove that the IRS (interest rate swap) gain will > the loss attributed to the deficit.
Indicate the type of swap needed.
2. Fixed Income Derivatives

The ZB US Treasury Bond Futures contract has a par of $100,000, an initial margin of $4,620, a maintenance margin of $4,200. The duration is 5 years and it is priced at 99. As an investor you open a futures trading account with $100,000.

How many contracts can you open (long)?
If the interest rates fall by 30 basis points, what is your ROI?
If the interest rates fall by 30 basis points, what is your dollar profit?
At what point will you get a margin call? Be specific.
If the Federal Reserve started to raise the interest rates, would you
Stay long?
Reverse and go short?
Desire to increase or decrease your portfolio duration?

 

Sample Solution

However, the teaching procedure is mainly an intervention that focuses on verbal communication and can be limiting to certain children with ASD, especially those who are severe. McGee et al. (1983) modified the standard incidental teaching for autistic children with severe language deficits shown evident progress in the subjects. However, the setting was more contrived and it was not based on the interests of the child. In addition, many studies mentioned that it is beneficial for the child to initiate, but it becomes challenging to use incidental teaching past a certain age because then the interests start to become narrower and more depleted.

It is also difficult to find a “perfect” intervention for ASD because it is a spectrum disorder, so the signs and symptoms vary among children. Therefore, each child is at a different level of severity, and each level of severity needs more or less assistance. It is going to be easier for high functioning children with ASD to learn how to have verbal communication that is socially functional than it would be for lower functioning children with ASD. It is also dependent upon the parents and the services of the child that determines the success of an intervention. Some parents do not have as much time to practice instructional teaching at home, so the procedure may only be done once or twice a week with therapy appointments. For example, McGee et al. (1999) had a home-based component in their study where to parents did an addition ten hours a week of teaching with their child, so that is also a contributing factor to the children’s progress. In addition, if a child does not have therapists that are educated adequately for the procedure, then the child will not have as much progress. This procedure, like many others in the field of ASD, is very dependent on outside factors to make it successful.

Overall, incidental teaching has many more benefits than limitations. It is a procedure that motivates the children and is an intervention that has a low probability of prompt dependency, which can be dangerous in interventions. The main component of incidental teaching that also makes it notable is that it has evidence to support the generalization across settings and people without prompts because those two components tend to be challenging among other interventions (McGee et al., 1999).

 

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