IF TSURAYAKI’S YIELD CURVE FORECAST IS CORRECT, THEN THE ACTUAL...

30. If Tsurayaki’s yield curve forecast is correct, then the actual price of the 15-year Treasury bond in

1 year’s time will most likely be:

A. lower than $111.50.

B. equal to $111.50.

C. greater than $111.50.

Portfolio Management—Fixed Income

Question 6

Use the following information to answer the next six questions.

Simon Carr is a fixed-income portfolio manager at Proficient LLC, a multi-asset investment advisor. As a

fixed income expert, he has been asked to prepare a presentation to the board of Proficient on the sources

of return in fixed-income markets. As part of his report he presents the default-risk-free par bonds with

different maturities displayed in Exhibit 1:

Exhibit 1

Default-Risk-Free Par Bonds Used in Carr’s Report

Yield Change

Price in 12 Months

Implied by Current

Yield Curve over

with Rolldown of

Next 12 Months

Security Descriptor

Static Yield Curve

Maturity (Years)

Coupon

Current Price

1

1.53%

100

100.00

0.73%

2

1.89%

100

100.35

0.77%

3

2.26%

100

100.72

0.70%

4

2.57%

100

100.89

0.49%

Carr intends to use the bonds in Exhibit 1 to demonstrate the performance of a 12-month investment in

fixed-income instruments of different maturities given the yield curve scenarios displayed in Exhibit 2:

Exhibit 2

Yield Curve Scenarios Demonstrated by Carr

Scenario A

Yield curve remains static.

Scenario B

Yield curve moves up by a parallel shift of 50 basis points.

Scenario C

Interest rates evolve according to the forward rates implied by the original yield curve.

Carr also intends to use the bonds in Exhibit 1 to demonstrate the active fixed-income strategy of “riding

the yield curve.” For the purpose of his analysis, he assumes that changes in yield occur at the end of the