R22 - FI Portfolio Management

Question 1

Leveraged portfolio return formula

Answer 1

Return = R + B/E*(R-c)

R = return on assets
B = dollar amount borrowed
E = equity invested
c = cost of borrowed funds (%)

Question 2

Leveraged Duration formula

Answer 2

De = DaA - DbB / E

De = duration of equity
Da = duration of invested funds
A = total assets
Db = duration of borrowed funds (in years)
B = amount borrowed
E = equity (A-B)

Question 3

Repo agreement def

Answer 3

sell security to someone with agreement to buy it back later.

Security is collateral and repo rate is the interest rate for the loan.

Question 4

How style of delivery of security in repo agreement affects repo rate:

Answer 4

physical delivery of collateral to buyer = lowest rate

held by neutral agent = higher

held by custody account at seller’s bank = even higher

Question 5

Factors affecting repo rates

Answer 5

repo term = longer term is higher rate. if yield curve is upward sloping same thing

quality/quanitty of collateral = lower quality is higher rate

collateral is in short supply = if very short supply then lower rate

prevailing rates increasing = higher repo rate