QUESTION: 189 Exam Topic: Alternative Assets

Ellen Truxel is the principal at Truxel Investment Management. Her firm uses bonds for income enhancement as well as capital gains. She occasionally uses sector quality bets and yield curve positioning to exploit her beliefs on the relative changes in sector credit quality and the direction of interest rates. She has recently hired John Timberlake to assist her in preparing data for the analysis of bond portfolios. Timberlake is a recent graduate of an outstanding undergraduate program in finance.
Truxel is considering investing in international bonds, as this is an arena she has previously ignored. During conversations, Truxel says it is her understanding that changes in international bond markets have made it easier to manage the duration of an international bond portfolio. Timberlake notes that the European Monetary Union has increased the availability of corporate bonds, making it easier to rotate across sectors.
In the domestic arena, Truxel is considering constructing a portfolio that matches the index on quality, call, sector, and cash flow dimensions and tilts the portfolio duration small amounts to take advantage of predictions of yield curve shifts. She states that this would be referred to as enhanced indexing with minor mismatches.
Timberlake tells her that the most important determinant of her performance relative to other bond managers will be her ability to perform credit analysis.
Truxel then tells Timberlake that before they venture into new areas, she wants him to prepare an analysis of their current positions. Timberlake obliges and presents the following data on Truxel’s current portfolio.

Regarding the conversation on domestic bond portfolio management, are Truxel and Timberlake correct or incorrect?

Both are correct.
Neither is correct.
One is correct.

Answer(s): C

Explanation:

Any duration mismatch is considered a large factor mismatch, so Truxel is incorrect-Timbcrlake is correct as credit analysis is the most important determinant of relative bond performance. (Study Session 9, LOS 29-b)

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QUESTION: 190 Exam Topic: Alternative Assets

Ellen Truxel is the principal at Truxel Investment Management. Her firm uses bonds for income enhancement as well as capital gains. She occasionally uses sector quality bets and yield curve positioning to exploit her beliefs on the relative changes in sector credit quality and the direction of interest rates. She has recently hired John Timberlake to assist her in preparing data for the analysis of bond portfolios. Timberlake is a recent graduate of an outstanding undergraduate program in finance.
Truxel is considering investing in international bonds, as this is an arena she has previously ignored. During conversations, Truxel says it is her understanding that changes in international bond markets have made it easier to manage the duration of an international bond portfolio. Timberlake notes that the European Monetary Union has increased the availability of corporate bonds, making it easier to rotate across sectors.
In the domestic arena, Truxel is considering constructing a portfolio that matches the index on quality, call, sector, and cash flow dimensions and tilts the portfolio duration small amounts to take advantage of predictions of yield curve shifts. She states that this would be referred to as enhanced indexing with minor mismatches.
Timberlake tells her that the most important determinant of her performance relative to other bond managers will be her ability to perform credit analysis.
Truxel then tells Timberlake that before they venture into new areas, she wants him to prepare an analysis of their current positions. Timberlake obliges and presents the following data on Truxel’s current portfolio.

Given a parallel shift in the yield curve of 60 basis points for Treasury yields, the approximate percent change in the value of the Truxcl portfolio is closest to:

3.2.
3.4.
5.3.

Answer(s): A

Explanation:

If there is a parallel shift in the yield curve of 60 basis points for Treasury yields, the approximate percent change is the modified duration of the portfolio times 0.6%. The modified duration of the portfolio is a weighted average of the individual sector durations: (0.12 x 5.3) + (0.3 x 5.4) + (0.3 X 5.5) 4 (0.28 x 5.0) = 5.3. The modified duration of 5.3 x 0.6% = 3.2% change in the portfolio value. (Study Session 9, LOS 29.g)

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QUESTION: 191 Exam Topic: Alternative Assets

Ellen Truxel is the principal at Truxel Investment Management. Her firm uses bonds for income enhancement as well as capital gains. She occasionally uses sector quality bets and yield curve positioning to exploit her beliefs on the relative changes in sector credit quality and the direction of interest rates. She has recently hired John Timberlake to assist her in preparing data for the analysis of bond portfolios. Timberlake is a recent graduate of an outstanding undergraduate program in finance.
Truxel is considering investing in international bonds, as this is an arena she has previously ignored. During conversations, Truxel says it is her understanding that changes in international bond markets have made it easier to manage the duration of an international bond portfolio. Timberlake notes that the European Monetary Union has increased the availability of corporate bonds, making it easier to rotate across sectors.
In the domestic arena, Truxel is considering constructing a portfolio that matches the index on quality, call, sector, and cash flow dimensions and tilts the portfolio duration small amounts to take advantage of predictions of yield curve shifts. She states that this would be referred to as enhanced indexing with minor mismatches.
Timberlake tells her that the most important determinant of her performance relative to other bond managers will be her ability to perform credit analysis.
Truxel then tells Timberlake that before they venture into new areas, she wants him to prepare an analysis of their current positions. Timberlake obliges and presents the following data on Truxel’s current portfolio.

If the OAS for all bond sectors changes by 60 basis points while Treasury yields remain unchanged, the approximate percent change in the Truxel portfolio is closest to:

3.2.
3.4.
5.3.

Answer(s): A

Explanation:

The spread durations for non-Treasuries are the same as their effective durations. The calculation and resulting change from a uniform widening of 60 bps in all spreads is the same as if the yield curve had shifted 60 bps with no change in the spreads. (Study Session 9, LOS 29.h)

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QUESTION: 192 Exam Topic: Alternative Assets

Ellen Truxel is the principal at Truxel Investment Management. Her firm uses bonds for income enhancement as well as capital gains. She occasionally uses sector quality bets and yield curve positioning to exploit her beliefs on the relative changes in sector credit quality and the direction of interest rates. She has recently hired John Timberlake to assist her in preparing data for the analysis of bond portfolios. Timberlake is a recent graduate of an outstanding undergraduate program in finance.
Truxel is considering investing in international bonds, as this is an arena she has previously ignored. During conversations, Truxel says it is her understanding that changes in international bond markets have made it easier to manage the duration of an international bond portfolio. Timberlake notes that the European Monetary Union has increased the availability of corporate bonds, making it easier to rotate across sectors.
In the domestic arena, Truxel is considering constructing a portfolio that matches the index on quality, call, sector, and cash flow dimensions and tilts the portfolio duration small amounts to take advantage of predictions of yield curve shifts. She states that this would be referred to as enhanced indexing with minor mismatches.
Timberlake tells her that the most important determinant of her performance relative to other bond managers will be her ability to perform credit analysis.
Truxel then tells Timberlake that before they venture into new areas, she wants him to prepare an analysis of their current positions. Timberlake obliges and presents the following data on Truxel’s current portfolio.

If the OAS for all bond sectors changes by 100 basis points while Treasury yields remain unchanged, which sector or sectors would contribute the most to tracking error for Truxel's portfolio?

BBB.
AAA.
AA and A, which contribute about the same.

Answer(s): B

Explanation:

To determine which sector could generate the greatest tracking error, calculate the contribution to the portfolios duration for each sector and do the same for the index. The sector whose duration contribution deviates the most from the benchmark will contribute the most to potential Tracking error. The contribution to duration is just the proportion invested in each sector times the sector's duration. For example, for AAA bonds in the portfolio, it is 0.12 x 5.3 = 0.636. For AAA bonds in the index, it is 0.35 X 5.3 = 1.855. The discrepancy between the portfolio and the index for this sector is 0.636 - 1.855 = -1.219. This is the largest absolute difference of all the sectors. The calculations for all the sectors are as follows:

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QUESTION: 189 Exam Topic: Alternative Assets

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