CAS Exam 9 Spring 2018, Question 9
Study guide: Exam 9
A company is evaluating an active bond management strategy to generate abnormal returns. Given the following:
| Bond | X | Y | Z |
|---|---|---|---|
| Bond Type | US Treasury | US Treasury | Corporate |
| Bond Maturity (Years) | 15 | 5 | 5 |
| Bond Rating | AAA | AAA | AAA |
| Current Yield | 4% | 4% | 6% |
| Long Term Historical Yield | 5% | 5% | 6% |
- The yield curve is flat.
- The bonds listed above were issued today.
- The bonds listed above are the only investment instruments available.
- All bonds are zero-coupon bonds.
- The company holds $1,000 in par value for each of X and Y.
- The company expects treasury rates to rise from 4% to 6% in 5 years.
Part a (0.5 points)
Describe the transactions associated with a rate anticipation swap.
Part b (0.75 points)
Calculate the additional assets that the company will own at the end of year 5 under the rate anticipation swap compared to the current portfolio.
Part c (0.5 points)
Describe another active strategy the bond manager can use to generate abnormal returns based on a perceived mispricing of bonds.
No current syllabus covers this question; it is kept for the record.
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