CFA 三级第三册课后2020 Level III - SchweserNotes Book 3.pdf

rate of the liability.) 2. Portfolio and liability basis point values match (BPV BPVL) 3. Asset dispersion of cash flows and convexity exceed those of the liabilities. (But not by too much, in order to minimize structural risk exposure to curve reshaping). 4. Regularly rebalance the portfolio to maintain the BPV match of A and L as time and yields change. EXAMPLE: U.K. bond company A U.K.-based company has several option-free bond issues (liabilities) outstanding. The company would like to retire the bonds early, and has more than sufficient funds to do so. The company considers a bond tender offer (offer to repurchase the bonds from the public), but the bonds are widely distributed among buy-and-hold investors. The prices that would have to be paid are too high to make the tender desirable to the company. The company could also establish a dedicated cash flow matched portfolio of U.K. government bonds and legally defease the bonds. In that case, both the company’s bond liabilities and assets (the cash flow matching bond portfolio) could be removed from the company’s balance sheet. The cost of the portfolio would be GBP475 million, and the company considers this too high. The third alternative is to establish a duration matching portfolio; using high-quality corporate bonds, the cost will be less than for the government bond portfolio. While the portfolio will not qualify for defeasance, the company believes it will improve its credit rating and is the better choice. The portfolio statistics for the company’s liabilities and three proposed corporate bond portfolios are shown in the following table. All calculations are annualized and based on aggregate portfolio cash flows. Each portfolio is considered sufficient to pay the liabilities. Monetary amounts are in