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Fixed Income > Liability-Driven and Index-Based Strategies > Flashcards

Liability-Driven and Index-Based Strategies Flashcards

1
Q

Liability-Driven Investing

A

(1) the future liabilities are defined
(2) the assets are managed to meet those future liability values

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2
Q

Asset-driven liabilities

A

(1) the asset are given
(2) the liabilities are managed/adjust in relation to those assets

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3
Q

type of liabilities

A

+ Type I: know amount - know time: option-free fixed rate bond
+ Type II: know amount - unknow time: life insurance, callable, putable bond
+ Type III: unknown amount - know time: Floating rate note, TIPS.
+ Type IV: unknown amount - unknown time: property & casual insurance, DB

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4
Q

immunization

A

+ process of
+ structuring and managing a fixed-income bond portfolio
+ to minimize the variance in the realized rate of return (cash flow yield)
+ over a known time horizon

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5
Q

portfolio dispersion

A

is often interpreted as a measure of the degree of uncertainty, and thus risk, associated with a particular security or investment portfolio.

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6
Q

zero replication

A

set up the portfolio with the same Macaulay duration, and then continually update it in order to keep it matched
Exhibit 7 - 294

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7
Q

structural risk

A

The risk is that yield curve twists and non-parallel shifts lead to changes in the cash flow yield that do not match the yield to maturity of the zerocoupon bond that provides for perfect immunization.

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8
Q

bond portfolio structure to immunize a single liability

A

+ initial MV of assets >= MV of liabilities
+ portfolio Macaulay Du match liability’s due date
+ minimized portfolio convexity statistic

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9
Q

managing interest rate risk

A

+ CF matching
+ Duration matching
+ Contingent immunization

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10
Q

accounting defesance / in-substance defeseance

A

extinguishing a debt obligation by setting aside sufficient high-quality securities, such as US Treasury notes, to repay the liability
(Bỏ nghĩa vụ nợ thông qua nắm giữ TP chất lượng tốt)

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11
Q

Derivative overlay / Future contracts

A

use future contract to close duration gap while keep the underlying portfolio unchanged

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12
Q

contingent immunization

A

is a hybrid active/passive strategy and requires a significant surplus
As long as that surplus is of sufficient size, the portfolio can be actively managed
At the extreme, assets could be invested in equity, commodities, real estate,…
(1) If the assets earn more than the initially available immunization rate, the surplus will grow, and can eventually be returned to the investor.
(2) If the strategy is unsuccessful, the surplus will shrink, and the portfolio must be immunized before the surplus declines below zero

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13
Q

Swaption Collar

A

= long receiver swaption + short payer swaption

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14
Q

Full Replication

A

An approach that purchase all securities in the index

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15
Q

Unwind

A

is a process of reversing or closing a trade by participating in an offsetting transaction

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16
Q

POD approximation

A

≈ Spread/LGD and LGD = (1 − RR)

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17
Q

yield spread

A

= bond’s YTM - the YTM of an on-the-run government bond of similar
maturity
+ Other name: benchmark spread

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18
Q

G-spread

A

= yield of Bond - interpolation of gov

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19
Q

ASW

A

= bond’s fixed coupon - maturity interpolate SFR

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20
Q

I-spread

A

= bond’s YTM - maturity interpolate asset swap rate

21
Q

QM

A

(1) Definition: yield spread over MRR of original FRN
(2) Advantages: Represents periodic spread related FRN cash flow
(3) Disadvantages: Does not capture changes in credit risk over time

22
Q

Discount margin

A

(1) Definition: Yield spread over MRR to price FRN at par
(2) Advantages: Establishes spread difference from QM with constant MRR
(3) Disadvantages: Assumes a flat MRR zero curve

22
Q

Discount margin

A

(1) Definition: Yield spread over MRR to price FRN at par
(2) Advantages: Establishes spread difference from QM with constant MRR
(3) Disadvantages: Assumes a flat MRR zero curve

23
Q

Z-DM

A

(1) Definition: yield spread over MRR curve
(2) Advantage: Incorporates forward MRR rates in yield spread measure
(3) Disadvantage: More complex calculation and yield spread does not match FRN cash flows

24
Q

Function of excess spread no defaults

A

ExcessSpread ≈ Spread0 − (EffSpreadDur × ΔSpread)

25
Q

Function of excess spread with default

A

Spread0 − (EffSpreadDur × ΔSpread) − (POD × LGD)
Spread0: include period
POD: sometime annualize

26
Q

Asset-liability management

A

strategies that consider assets in relation to liabilities. It is appropriate when both the present value (PV) of the assets and liabilities change with changing interest rates.

27
Q

3 Rules for immunizing a single liability

A

(1) Initial portfolio market value (PVA) equals (or exceeds) PVL.
(2) Portfolio Macaulay duration matches the due date of the liability (DA = DL)
(3) Minimize portfolio convexity

28
Q

compare laddered bond portfolio to other in diversified between price and reinvestment risk

A

Laddered portfolio is higher

29
Q

compare laddered portfolio to barbell in reinvestment risk

A

laddered bond portfolio is less reinvestment risk

30
Q

compare laddered portfolio to bullet in convexity

A

laddered bond portfolio is greater convexity

31
Q

tool to adjust duration gap

A

(1) Treasury bond contracts
(2) Interest rate swaps
(3) Swaption

32
Q

money Duration

A

= Dollar Duration
(1) the price change in units of the currency in which
the bond is denominated
(2) = BPV / 0.0001
(3) = ModDur x PV
(4) Meaning: to serve immunize portfolio

33
Q

Portfolio dispersion

A

= [(t-MacDur)^2] X Weight

34
Q

Disadvantage of immunization

A

ignore convexity

35
Q

The conditions to immunize multiple liabilities

A

(1) the market value of assets is greater than or equal to the market value of the liabilities,
(2) the asset basis point value (BPV) equals the liability BPV, and
(3) the dispersion of cash flows and the convexity of assets are greater than those of the liabilities.

36
Q

advantages of ladder portfolio

A

(1) High credit quality
(2) Liquidity
(3) Yield curve diversification

37
Q

2 method in derrivatives overlay

A

(1) using future
(2) using swap

38
Q

What is social responsible investing

A

is ESG

39
Q

spread risk/ basis risk

A

+ the risk that a bond’s price will change in response to an idiosyncratic rate move rather than an overall market yield change is known
+ = MV asset - MV derivative to hedge it

40
Q

what kind of duration to model Type I, Type II, Type III, Type IV

A

Type I: Modified Duration
Type II, III, IV: Effective Duration

41
Q

which expose rollover risk
(1) ETF
(2) Mutual fund
(3) Total return swap

A

(3) total return swap

42
Q

relationship of CF dispersion and convexity

A

For portfolios with the same Macaulay duration and cash flow yield: the portfolio with the greatest dispersion of cash flows will have the highest convexity

43
Q

collateral exhausted risk

A

the risk that the manager has no anymore assets to collaterized
how to expose: short payer swaption

44
Q

ABO (definition) and PBO (definition)

A
  1. ABO
    + accumulated benefit obligation
    + calculates the liability of Pension plan
    + based on the G years worked and the current annual wage
  2. PBO:
    + projected benefit obligation
    + measure uses the projected wage for year T instead of the current wage
45
Q

why treasury bond volatile than HY corp bond ?

A

Treasury bond is more volatile because:
+ Is being trading more
+ HY corp bond include spread + risk free interest -> sometime fluctuate not the same side -> less volatile than treasury bond

46
Q

ABO (accumulated benefit obligation)

A

The ABO calculates the liability based on the G years worked and the current annual wage

47
Q

PBO (projected benefit obligation)

A

Tính giống ABO, nhưng dựa trên projected wage

Fixed Income (4 decks)

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