NO.PZ2023032703000094
问题如下：
In preparation for the meeting, Thorn
meets with his team to discuss potential fixed income investment strategies.
Alex Book, a junior fixed income portfolio manager, updates Thorn on the spread
analysis he has used to identify potential trades. Book makes the following
statements.
l Statement 1: An increase in interest rate
volatility will cause nominal spreads on callable corporate bonds to widen.
l Statement 2: Using putable bonds will
allow us to obtain full protection from any large deterioration in an issuer’s
credit.
l Statement 3: Buying MBS will add
convexity to the portfolio, which will result in a greater benefit from a large
change in interest rates.
A. Determine whether each of Book’s three
statements is most likely correct. Justify each response.
选项：
解释：
Correct Answer:
Statement 1 is correct. A callable bond is a bond with an embedded short call option. The value of a callable bond is equal to the value of an option-free bond less the value of the embedded option. The value of the embedded call option owned by the issuer will increase as volatility rises, reducing the value of the bond versus a similar option-free bond, thus causing nominal spreads to increase.
Statement 2 is incorrect. A putable bond is a bond with an embedded long put option. An investor buying a putable bond buys a bond with a long put option, giving him the right to redeem the bond before maturity. In the event of significant credit deterioration, the issuer’s ability to meet the put and redeem the bond would be in question.
Statement 3 is incorrect. An MBS is a bond with an embedded short call option. A short call option has negative convexity. Adding more MBS to a portfolio will decrease the convexity of the portfolio and thus result in a smaller (not greater) benefit from a large change in interest rates.
Statement 1: An increase in interest rate volatility will cause nominal spreads on callable corporate bonds to widen.
Statement 1 is correct. A callable bond equals to long a normal bond and short call option. Since the interest volatility increase, the call option is more likely to executed. The price of callable bond decreases and nominal spreads widen.
Statement 2: Using putable bonds will allow us to obtain full protection from any large deterioration in an issuer’s credit.
Statement 2 is incorrect. Since the putable bond equals to long a normal bond and long a put option. When the interest rates increase, investor can execute at the putable price. But when large deterioration in an issuer’s credit, the issuer may have no ability to buyback.
So it can't obtain full protection from any large deterioration in an issuer’s credit.
Statement 3: Buying MBS will add convexity to the portfolio, which will result in a greater benefit from a large change in interest rates.
Statement 3 is incorrect. Buying MBS will decrease convexity to the portfolio because it's more likely a short option.
