Question #74

Reading: Reading 27 Valuation and Analysis of Bonds With Embedded Options - Anwers

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Part of Context Group: Q74-76 First in Group
Shared Context
- Are the two observations Berg writes down after the fixed income conference advantages to using the swap rate curve as a benchmark instead of a government bond curve? A) Only Statement 1 is an advantage. B) Both statements are advantages. C) Only Statement 2 is an advantage. Explanation Swap rates are fixed rates on plain-vanilla interest rate swaps. The swap rate curve (also known as the LIBOR curve) is the series of swap rates quoted by swap dealers over maturities extending from 2 to 30 years. Both of Berg's observations are advantages to using the swap rate curve instead of a government bond curve as a benchmark rate curve. (Module 25.3, LOS 25.e)
Question
If the spot-rate curve experiences a parallel downward shift of 50 basis points:
Answer Choices:
A. Portfolio 1 will experience the best price performance
B. all three portfolios will experience the same price performance
C. Portfolio 3 will experience the best price performance. Explanation The sum of a portfolio's key rate durations is the effective duration of the portfolio. Each of the portfolios has an effective duration of five, so a parallel shift in the yield curve will have the same effect on each portfolio, and each will experience the same price performance. (Module 25.6, LOS 25.j)
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