BUFN 732 – Fixed Income Analysis
FINAL EXAM
TERM D, Spring 2020


In completing this exam, you are allowed to use the class material. However, you are not
allowed to provide any kind of help or receive any kind of help from anyone to complete this
exam.

You need to hand in an Excel spreadsheet for answers to the questions. On the first Sheet
(Named Honor Pledge) please type in your full name and the following to reflect the Honor
Pledge that you completed this exam on your own:

“I (type in your full name) pledge on my honor that I have not given or received any
unauthorized assistance on this assignment/examination.”

Provide an answer to each question on separate sheets. Name the Sheets as “Question 1,”
“Question 2”, etc. Show calculation clearly and label graphs and tables appropriately on the
spreadsheets you create.

The 8% yield curve of Chapter 5 should be used for all questions. Shifts in the yield curves are
assumed to be uniform. All bonds in this final exam are government bonds that are free of
default risk.

Question 1.
On Sheet 1 (Named as Question 1), create the performance surface of a 10-year zero-coupon
bond with face value $1.

Question 2. The trading universe for this question is as follows.

Suppose the net equity is $50,000.00. The assets that can be held as assets are
 3 year zero coupon bond with face value of $12,892.53.
 20 year zero coupon bonds (with face value equal to $73,074.31).

The liabilities are 300 units of 20-year coupon bond (with annual coupon payments of $1,009.09
and face value of $9,363.03).You need to maintain this position in the liabilities.

Also, available is a forward contract, which matures in 6 months. The forward contract delivers a
zero coupon bond which has face value of $10,000, and this zero coupon bond matures in 18
months from today.




On Sheet 2 (Named as Question 2)

1. Calculate the market value of 3-year zero and 20-year zero, and 20-year coupon
bond. Calculate the forward price and forward rate for the forward contract.

2. As a financial analyst, you want to construct a delta-gamma hedged equity. To do
that, find the number units of 3-year zero and 20 year zero plus the number of
forward contracts to be held as assets such that given your 300 units of 20-year
coupon bond liabilities, the 50,000 equity will have zero delta and zero gamma.

Question 3

The trading universe for this question is:
Security A: 3-year zero-coupon bond with $12892.53 face value
Security B: 20-year zero-coupon bond with $73074.31 face value
Security C: 20-year coupon bond with $1009.09 coupon (paid annually) and $9363.03 face
value. The first coupon will be paid in one year.

On Sheet 3 (Named as Question 3 – Part a)
Part a. Create performance profiles of these securities (3-year zero, 20-year zero and 20-year
coupon bond). Calculate delta, gamma, and theta of each security (A, B, and C)
.
On Sheet 4 (Named as Question 3 – Part b)
Part b. Your target is to create a delta and gamma hedged equity position. Assume you go
through similar calculations as in Question 2 and calculate assets consisting 13.76 units of 3-
year zero and 3.41 units of 20-year zero with liabilities 12.175142 units of 20-year coupon bond
to achieve your target of zero delta, zero gamma for the $50,000 net equity value.

Create performance profiles of asset, liabilities and net equity at time =0 (immediately after the
hedge). Calculate delta, gamma, and theta of assets, liabilities, and net equity position at time
=0 (immediately after the hedge). The tables that you create to graph the performance profiles
needs to be clearly labeled

On Sheet 5 (Question 3 – Part c)
Part c. Create performance profiles of asset, liabilities and net equity at time =1. Calculate delta,
gamma, and theta of net equity position at time=1. The table that you create to graph the
performance profile needs to be clearly labeled.

Hint: The first coupon payment of Security C is a cash outflow at Year 1. Make sure you keep
the balance sheet balanced all the time.




On Sheet 6 (Question 3 – Part d-e)

Part d. Draw performance profiles for the net equity of the hedged balance sheet at t=0 and T=1
on the same graph.

Part e. What is the percentage appreciation in net equity between time zero and time 1
assuming the yield curve remains constant? Why is this percentage sensible?































































































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