QUESTIONS 43-48 RELATE TO FIXED INCOME PORTFOLIO MANAGEMENT. QUESTIONS...

90.57 / 1.1346 = 79.8255.

Buy: 1,883 / 79.8255 = 24 contracts

For Further Reference:

Study Session 10, LOS 22.c, d, e

SchweserNotes: Book 3 p.253, 259, 265

CFA Program Curriculum: Vol.4 p.64, 78, 88

Question #47 of 60

If a cash matching portfolio is built using the gilts in Exhibit 4 to defease the debt payments

in Exhibit 3, which of the following is closest to the par value that will be purchased of the

September 2020 gilt?

A) 2.675 million.

B) 2.642 million.

C) 2.603 million.

This is a recursive calculation. You must start with the longest liability and work to the next

longest. In each calculation, buy sufficient amount of the bond that par plus all coupons

available are sufficient to pay the liability.

The March 2021 liability is 2,980,000. To fully fund this, we will need to buy the amount of

par value of the March 2021 bond such that par + final coupon = 2,980,000, so:

par

Mar21

= 2,980,000 ÷ (1 + (0.027/2)) = 2,940,306

The coupon on this bond will be 2,940,306 × (0.027 / 2) = 39,694

The Sept 2020 coupon on this bond will pay off part of the Sept 2020 liability, leaving