Unit ko samjho · NISM Series XXI-B
Fixed Income Portfolio Management Strategies
14 questions is unit mein
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- Which bond-portfolio structure spreads maturity dates across several successive periods?
- Which maturity structure combines short-term and long-term bonds with relatively little intermediate exposure?
- Which maturity structure concentrates bond holdings around a particular future maturity date?
- What is the main objective of classical bond-portfolio immunisation for a known liability?
- A borrower pays floating interest and wants to reduce exposure to rising rates through a matching swap. Which swap direction fits?
- A bond manager expects market yields to rise and wants less price sensitivity, with credit quality unchanged. Which change fits that aim?
- A corporate bond’s credit spread narrows while the government yield curve and expected cash flows remain unchanged. What is the usual price effect?
- What does cash-flow matching target more directly than aggregate duration matching?
- A liability-matching bond portfolio initially matches present value and duration. Why should the match still be reviewed as time passes and cash flows occur?
- A plan must pay ₹1.21 crore exactly two years from now. For this case, the appropriate risk-free discount rate is 10% with annual compounding and no other liabilities. What present asset value funds the liability?
- The plan’s liability has a two-year Macaulay duration. Available zero-coupon assets have one-year and three-year durations. What market-value weight in the one-year asset matches the liability’s duration?
- The plan’s asset portfolio is worth ₹1 crore and has a two-year Macaulay duration at a 10% annually compounded yield. Consider a separate parallel yield rise of one percentage point. Ignoring convexity, what is the approximate fall in asset value?
- In the plan, one zero-coupon asset matures after one year but the liability is due after two years. The first maturity proceeds must be invested for the remaining year. What risk arises if the rate available then is lower than expected?
- An initially fully funded plan holds ₹50 lakh each in one-year and three-year zero-coupon bonds yielding 10% annually. Its two-year liability initially has ₹100 lakh present value. In a separate shock, the one-year yield falls two percentage points, the three-year yield rises one point, and the two-year yield is unchanged. Ignoring convexity, what funding change results?
Zaroori ideas
Practice bank se · 1
Which bond-portfolio structure spreads maturity dates across several successive periods?
A ladder spreads maturities across successive periods. This creates a schedule of maturing holdings, although reinvestment rates and issuer risks still matter. Remember: A bond ladder staggers maturity dates.
Hint Picture a series of maturity dates rather than one point or two ends. Common mistake: Assuming staggered maturities eliminate all interest-rate and credit risks.
XXI-B-123Practice bank se · 2
Which maturity structure combines short-term and long-term bonds with relatively little intermediate exposure?
A barbell combines shorter and longer maturities with relatively little in the middle. Its risk depends on the amounts, durations and cash flows at both ends. Remember: Barbell describes a maturity distribution, not a promise of lower risk.
Hint Identify the two ends of the maturity range. Common mistake: Equating the average maturity with the full pattern of interest-rate exposure.
XXI-B-124Practice bank se · 3
Which maturity structure concentrates bond holdings around a particular future maturity date?
A bullet structure concentrates maturities around a selected future date. Concentration around that date does not by itself ensure exact liability cash-flow matching. Remember: A bullet and a ladder have different maturity distributions.
Hint Look for a focused maturity area rather than a spread of maturity dates. Common mistake: Assuming a maturity cluster automatically matches every future payment obligation.
XXI-B-125Practice bank se · 4
What is the main objective of classical bond-portfolio immunisation for a known liability?
Classical immunisation seeks to reduce the funding position’s sensitivity to small interest-rate changes under its assumptions. It does not eliminate credit risk, large-shock risk or every yield-curve risk. Remember: Immunisation is a defined interest-rate-risk technique rather than a universal guarantee.
Hint Think about the relationship between asset cash flows and a future obligation. Common mistake: Interpreting an immunised portfolio as immune to every possible loss.
XXI-B-126Practice bank se · 5
A borrower pays floating interest and wants to reduce exposure to rising rates through a matching swap. Which swap direction fits?
Paying fixed and receiving matching floating interest can offset the original floating-rate borrowing cost. Differences in reference rates, reset dates or notionals can still leave basis risk. Remember: A matching swap can change the form of interest-rate exposure.
Hint Offset the original floating payment before considering the remaining net payment. Common mistake: Choosing a swap side that adds to the liability’s existing floating-rate exposure.
XXI-B-127Practice bank se · 6
A bond manager expects market yields to rise and wants less price sensitivity, with credit quality unchanged. Which change fits that aim?
Reducing duration reduces approximate price sensitivity to a yield rise, other things equal. It expresses the manager’s stated objective rather than guaranteeing a profitable forecast. Remember: Duration is central to expressing an interest-rate view through bond exposure.
Hint Relate duration to the approximate price response to a yield change. Common mistake: Confusing a higher coupon with a complete description of interest-rate risk.
XXI-B-128Practice bank se · 7
A corporate bond’s credit spread narrows while the government yield curve and expected cash flows remain unchanged. What is the usual price effect?
The bond’s price usually rises because a narrower credit spread lowers the required yield for unchanged cash flows. The contractual coupon need not change. Remember: Credit-spread movements can change bond values even with a stable government yield curve.
Hint Trace the spread change through the required yield used to discount cash flows. Common mistake: Attributing every bond-price move solely to the risk-free yield curve.
XXI-B-129Practice bank se · 8
What does cash-flow matching target more directly than aggregate duration matching?
Cash-flow matching targets asset payments corresponding to liability dates and amounts. Aggregate duration matching aligns a sensitivity measure but does not necessarily reproduce that schedule. Remember: Matching duration and matching cash flows are different levels of alignment.
Hint Compare matching a whole schedule with matching a summary sensitivity measure. Common mistake: Assuming equal duration means every liability payment is exactly covered when due.
XXI-B-130Practice bank se · 9
A liability-matching bond portfolio initially matches present value and duration. Why should the match still be reviewed as time passes and cash flows occur?
The match needs review because the assets’ and liability’s sensitivities can evolve differently as time passes and payments occur. Rebalancing may be needed even without a credit event. Remember: Immunisation is a monitored process rather than a permanent label.
Hint A match is measured at a point in time rather than permanently attached to the holdings. Common mistake: Treating the initial duration match as a set-and-forget solution.
XXI-B-131Practice bank se · 10
A plan must pay ₹1.21 crore exactly two years from now. For this case, the appropriate risk-free discount rate is 10% with annual compounding and no other liabilities. What present asset value funds the liability?
The required present value is ₹1 crore because ₹1 crore grows to ₹1.21 crore in two years at 10%. Present value = ₹1.21 crore ÷ 1.10² = ₹1.21 crore ÷ 1.21 = ₹1 crore. Remember: Funding begins by valuing the liability on an appropriate present-value basis.
Hint Bring the future liability back through both annual discount periods. Common mistake: Comparing today’s asset value directly with an undiscounted future obligation.
XXI-B-132Practice bank se · 11
The plan’s liability has a two-year Macaulay duration. Available zero-coupon assets have one-year and three-year durations. What market-value weight in the one-year asset matches the liability’s duration?
A 50% weight in the one-year asset gives a two-year portfolio duration. Set 1w + 3(1 − w) = 2. Then 3 − 2w = 2 and w = 0.50. The remaining 50% is in the three-year asset. Remember: Portfolio duration weights use market values rather than bond face values.
Hint Make the weighted asset duration equal to the liability’s duration. Common mistake: Using equal face amounts as though they necessarily gave equal market-value weights.
XXI-B-133Practice bank se · 12
The plan’s asset portfolio is worth ₹1 crore and has a two-year Macaulay duration at a 10% annually compounded yield. Consider a separate parallel yield rise of one percentage point. Ignoring convexity, what is the approximate fall in asset value?
The approximate fall is ₹1.82 lakh because modified duration is 1.8182. Modified duration = 2 ÷ 1.10 = 1.8182. Approximate percentage price change = −1.8182 × 0.01 = −1.8182%. Monetary fall = ₹100 lakh × 1.8182% = ₹1.8182 lakh. Remember: Convert Macaulay duration to modified duration before estimating a price change.
Hint Use the price-sensitivity version of duration and keep the yield change in decimals. Common mistake: Using percentage points as whole numbers in the duration approximation.
XXI-B-134Practice bank se · 13
In the plan, one zero-coupon asset matures after one year but the liability is due after two years. The first maturity proceeds must be invested for the remaining year. What risk arises if the rate available then is lower than expected?
This is reinvestment risk because the maturity proceeds may earn less than expected during the remaining year. Early receipt of cash does not lock in its later reinvestment return. Remember: Asset maturity before a liability date can create a reinvestment gap.
Hint Focus on the rate earned between receiving the money and needing to pay it out. Common mistake: Assuming receiving cash early automatically removes all funding risk.
XXI-B-135Practice bank se · 14
An initially fully funded plan holds ₹50 lakh each in one-year and three-year zero-coupon bonds yielding 10% annually. Its two-year liability initially has ₹100 lakh present value. In a separate shock, the one-year yield falls two percentage points, the three-year yield rises one point, and the two-year yield is unchanged. Ignoring convexity, what funding change results?
The shock creates an approximate ₹45,455 deficit because the longer-bond loss exceeds the shorter-bond gain while liability value is unchanged. One-year modified duration = 1 ÷ 1.10 = 0.9091. Its gain = −0.9091 × (−0.02) × ₹50,00,000 = ₹90,909. Three-year modified duration = 3 ÷ 1.10 = 2.7273. Its loss = −2.7273 × 0.01 × ₹50,00,000 = −₹1,36,364. Net asset change = ₹90,909 − ₹1,36,364 = −₹45,455. The two-year liability discount rate is unchanged, so the same deficit appears in funding. Remember: An aggregate duration match may not protect against non-parallel yield-curve changes.
Hint Estimate each maturity bucket separately, then compare the asset change with the unchanged liability value. Common mistake: Applying a single parallel-shift hedge conclusion to different changes at different maturities.
XXI-B-136