Sample Paper

Fixed Income Securities (GMBA – November 12, 2010 – Singapore)

Professor Suresh Lalwani

Duration: 120 Minutes

Marks: 60

Open-Book, Open-notes, No Internet

Please Answer on Answer Sheets provided

Please support all answers with your justifications / workings. Else marks will be deducted

(Q1) Discuss (15 Marks – 5 marks Each)

a) Development of the Interest swap market.

b) The following passage is meant to test your understanding of the concept of duration in a real life situational context. Please fill in the blanks with the words, either ‘High’ or ‘Low’ only.

If you were considering buying a bond and you expected interest rates to interest rates to increase, you would prefer a bond with a _______ duration. Relative to a bond with a high coupon rate, a bond with a low coupon rate would have a ______ duration. A Bond with a short maturity generally has a _______ duration compared to a bond with a longer maturity. A one-year Corporate bond with a 8% coupon rate has a ________ duration relative to a one-year T-Bill.

(Q2) How can a repurchase agreement be used by a dealer firm to finance a long position in a bond? Why would a lender of funds in a repo transaction be exposed to credit risk? (5 Marks)

(Q3) “Forward rates are poor predictors of the actual futures rates that are realized. Consequently, they are of little value to an investor”. Explain why you agree or disagree with this statement. (5 Marks)

(Q4) a 30-year old treasury bond is issued with face value of INR 1,000/- paying interest of INR 60 per annum. If the market yields increases shortly after the T-Bond is issued, what happens to the bond; A-Coupon Rate, B-Price, C-YTM, D-Current Yields? (5 Marks)

(Q5) You have purchased at par a 5 year 12% semi-annual coupon of INR 1,000 face value bond. Another option of 6 year, 6% semi-annual coupon INR 1000 face Value bond is available. Assuming that both bonds have same yield, what would you be willing to pay for the 6 year bond? (Please show workings) (5 Marks)

(Q6) Large Industries bonds sell for INR 1065.15. The bond life is 9 years and the yield to maturity is 7%. What must be the coupon rate on the bonds? (Please show working) (5 Marks)

(Q7) Consider the following Reverse Repo transaction details: (10 Marks)

Security Name: 12.40% GOI 2013 -Last Coupon Date: 20 Aug-09 (basis 30/360)

Notional Price (INR/p): 124.98 -Trade Date: 28-Dec-09

Repo Rate: (% p.a.) 7.25% -Settlement Date: 29-Dec-09

Repo Tenor (days): 14

Repo Value: 1000,00,00,00

Please calculate the:

a) Total principle outstanding (INR) – 4 Marks

b) Total repayment payable to lender of funds on due date (INR) – 1 Mark

c) Reversal (repurchase) price per bond for the borrower of funds (Rs/pp) – 5 Marks

(Q8) You have the following yield curve published in the Wall Street Journal

Yield (% pa) Maturity

4.20% 6 Months

4.40% 1 Year

4.80% 2 Years

5.10% 3 Years

5.20% 4 Years

What is the 1 year forward rate for period beginning 1 year from today? (12X12FRA). Show detailed working in terms of equation for forward rates as discussed in class. However, please assume annual compounding / discounting for your calculation. (10 Marks)