A. “INTRODUCTION TO BOND PORTFOLIO MANAGEMENT” (STUDY SESSION 6) E)...

1. A. “Introduction to Bond Portfolio Management” (Study Session 6) e) explain performance risk and discuss the risks associated with managing a portfolio against a liability structure (i.e., cap risk, call risk, and interest rate risk); f) explain the importance of duration and convexity in economic surplus management, and compute the change in the surplus of an institution, given a change in interest rates; 2006 Level III Guideline Answers Morning Session - Page 25

Guideline Answer: Part A Template for Question 9-A Determine whether If you disagree, justify your answer with one reason related to asset-liability management you agree or Proposed funding disagree with each Note: Justifying your answer by simply reversing solutions of the proposed an incorrect proposed funding solution will funding solutions receive no credit. (circle one) Interest rate risk remains because the durations of Agree the asset and liability do not match. In order to