Q17.4 Is it that the MD (modified duration) of the $10M fixed-rate bond issued by Anderson 5 years ago is - 4.0 (not + 4.0, because it pays fixed rate) ? or only in an I/R swap that the bonds will have negative MD when pays fixed-rate (receive floating rate) ? On the other hand, the notional principal is calculated as $10M x (4/3.5) = 11.43M in its solution. Is it that this uses the same equation for adjusting duration of FI portfolio (Please refer to CFAI text V5 P.485~488) ? It seems something different to me ! Q17.6 Answer A (statement 1) is said to be the correct answer. However, it stated : -------- so long-term returns can be poor" in statement 1, while it stated : -------offering the potential for high returns in its solution. Is it discrepant ? Anyone can clarify / explain ?
AMC Wrote: ------------------------------------------------------- > Q17.4 > Is it that the MD (modified duration) of the $10M > fixed-rate bond issued by Anderson 5 years ago is > - 4.0 (not + 4.0, because it pays fixed rate) ? or > only in an I/R swap that the bonds will have > negative MD when pays fixed-rate (receive floating > rate) ? I just went across this Q on 2010 practice exam yesterday… Yes to the 1st Q. It is -4.0 since Anderson is the bond issuer (opposite position as bond holder) and pay fixed. The swap has a +MD and receive fixed-rate. > > On the other hand, the notional principal is > calculated as $10M x (4/3.5) = 11.43M in its > solution. Is it that this uses the same equation > for adjusting duration of FI portfolio (Please > refer to CFAI text V5 P.485~488) ? It seems > something different to me ! It is the same formula. The target MD is zero, as the objective is to convert to floating-rate. The nominator in the middle is [0-(-4)]=4 > > Q17.6 > Answer A (statement 1) is said to be the correct > answer. > However, it stated : -------- so long-term returns > can be poor" in statement 1, while it stated : > -------offering the potential for high returns in > its solution. Is it discrepant ? > > Anyone can clarify / explain ? Errata updates on Schwezer website asks to change to “…can be good”
James@Houston, TKVM forv your clarification !