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Study Session 10-11: Fixed-Income Portfolio Management

Liability Driven Investing: Defined Benefits Plan Example

Hi all. So under Liability Driven Investing, CFAI uses a defined benefit plan as an example to illustrate how to deal with type IV liabilities. Earlier in the reading they gave this as Type II liability since you can project the amount using actuarial science. Is it a Type II or a Type IV liability?

My second question is on the Projected Benefits Obligation Formula. For the annuity, It only uses the period for vesting( G years). Shouldn’t it be the total years worked (G + T) years?


Hedging callable bonds with swaptions


Just don’t fully understand the need to write a payer swaption in the following case:

A bank has an outstanding 10 years fixed rate bond, callabe in 3 years (liability) and also enough cash to retire that debt. That option though is not advisable as per the excessive cost of a tender offer. The bank opts for acquiring a 10 years fixed rate corporate bond. And also writing a receiver swaption (in 3 years). But what’s the point?

Fixed Income

In Liability Driven Strategies, reading 19, one possibility is that the plan sponsor allows the manager some flexibility in selecting the hedging ratio. This flexibility in selecting the hedging ratio can be called strategic hedging. For example, the mandate could be to stay within a range of 25% to 75%. 

When the manager anticipates lower market rates and gains on receive-fixed interest rate swaps, the manager prefers to be at the top of an allowable range - I did not understand this, why manager prefers to be at the top of an allowable range.

Do MBS have POSITIVE convexity when rates rise?

I understand what happens when rates fall.  My old CFA readings seem to imply that when rates rise, MBS are positively convexed due to the decline of the prepay option.  These are from 2013, FYI.

Is that right?  My understanding is that when rates rise, prepayments slow.  Pretty straightforward.  But shouldn’t this cause the price to decline MORE than an option free bond of similar maturity?  A potable bond would be positively conveyed when rates rise, not MBS?

Calculate YTM of future bond puruchase

My cousin’s just asked me how to solve a question on YTM of  a bond and she has been given the following info:

Coupon - 10% (paid semi-annually)

Issue Date - 01.10.2014

Maturity Date - 30.09.2022

Outstanding Amount - Rs. 104,208,410,000

Face Value - Rs. 100/bond

The question wants us to assume that the bond is purchased on 01.10.2019

Yield Curve Inversion

What’s going on :O

YC looking like a rollercoaster ride at Six Flags

Effect of rate change on performance of a bond hedge: Difficult question

Lets say I have a bond portfolio that i have hedged by shorting a certain number of futures.

In case all rates increase over 3 months, but short term rates increase less than the medium term rates and medium term rates increase less than long term rates. 

What effect will this have on the hedge??


CFA level 3 Mock PM 2019 - Question 40

Can someone please explain to me how they get those numbers for question 40? 

in the solution they post below formula and the results but no calculations: 

Predicted change = Portfolio par amount × Partial PVBP × (–Curve shift)

thanks in advance amigos

Barbell vs Laddered portfolio

Is it fair to say that barbell portfolios are more liquid than laddered portfolios because they have more short term bonds than laddered? I always thought laddered was more liquid because I thought I read that somewhere in CFA material but MM Mock#4 in PM section says that Barbell is more liquid…anyone else see this discrepancy?