EF507 – Fixed Income
Semester 1 Examinations 2022/2023 Page 1 of 7
DUBLIN CITY UNIVERSITY
SEMESTER 1 EXAMINATIONS 2022/2023
MODULE: EF507 – Fixed Income Securities
PROGRAMME(S):
YEAR OF STUDY: 2
EXAMINER(S):
Dr. Thomas Flavin
Prof. Brian O’Kelly
TIME ALLOWED: 2 Hours
INSTRUCTIONS: Answer all questions.
PLEASE DO NOT TURN OVER THIS PAGE UNTIL YOU ARE INSTRUCTED TO DO SO.
The use of programmable or text storing calculators is expressly forbidden.
There are no additional requirements for this paper.
MSc in Investment, Treasury & BankingEF507 – Fixed Income
Semester 1 Examinations 2022/2023 Page 2 of 7
1. Shefa Yamin Ltd, an Israeli company, must pay INR 100m to an Indian firm in two months for
services provided. The spot exchange rate is INR 23.96/ILS and the continuously compounded
two-month spot rates in Indian Rupees (INR) and Israeli Shekels (ILS) are 6.25% p.a. and 3.25%
p.a., respectively:
a) What forward exchange rate can Shefa Yamin obtain? 2 marks
Shefa Yamin decide to buy INR 100m two months forward from Bank Leumi at this forward
exchange rate:
b) Characterise in options terms the counterparty credit exposure which Bank Leumi faces.
2 marks
c) Characterise in options terms the counterparty credit exposure which Shefa Yamin faces.
2 marks
d) Does Bank Leumi or Shefa Yamin face the greater counterparty credit exposure? Please
explain your reasoning. 2 marks
One year ago, Shefa Yamin entered a five-year swap in which they agreed to pay Bank Leumi
3% p.a. The four-year swap rate today is 4.5% p.a.
e) What credit exposure, if any, does Bank Leumi face now? Please explain your reasoning.
2 marks
f) Sketch the potential future credit exposure which Bank Leumi faces. 2 marks
Total for Q1: 12 marks
2. The Debt Management Office (DMO) in the UK decides to issue an 18-month linker paying a 2%
p.a. coupon semi-annually. The expected inflation over the next 18 months is 12% p.a.,
compounded semi-annually:
a) If the bond has a par value of 100 and the real yield is minus 1% p.a., compounded semi-
annually, calculate the price of the bond. 4 marks
b) On 11 October 2022, Robert Armstrong in the Financial Times commented on market
moves the previous day: “In price terms, the 10-year linker fell 5.5%; developed world
sovereign bonds are not supposed to move like that (the 30-year linker was down 16%
on the day).” What would cause the price of linkers to fall as they did? 3 marks
In an article on 14 April 2022 in the Irish Independent entitled “Inflation-linked NTMA bonds
bite taxpayers”, Donal O’Donovan commented that the State was facing “dramatically
ballooning costs” on its €900m of linkers:
c) How should the NTMA decide between issuing conventional bonds and linkers? 3 marks
d) Was it a mistake for the NTMA to issue linkers? Please explain your reasoning. 2 marks
Total for Q2: 12 marksEF507 – Fixed Income
Semester 1 Examinations 2022/2023 Page 3 of 7
3. Dave McEvoy and Nicola Commins (DCU, 5-Nov-22) discussed how the NTMA manages Ireland’s
debt:
a) How does the NTMA issue debt? 2 marks
b) What types on entity buy Irish debt? Where are they located? Could this present risk to
the country in the future? 3 marks
c) “Quantitative tightening (QT) is perhaps the biggest risk facing the country in the coming
years.”
i) How is quantitative tightening likely to impact the market for Irish bonds?
2 marks
ii) How is the NTMA trying to mitigate the risk which QT presents? 2 marks
d) Briefly cite the key measures used to assess sovereign debt sustainability. What metric is
the most important? 3 marks
Total for Q3: 12 marks
4. Credit default swaps (CDS) are often characterised as insurance. But there are a number of key
differences between how insurance and CDS work:
a) Briefly outline the key differences. 2 marks
b) How do these differences affect the market? 2 marks
Total return swaps (TRS) are another commonly used credit derivative:
c) Using a sketch, show how a TRS is used. 2 marks
d) What are the benefits of a TRS to
i) The TRS receiver? 2 marks
ii) The TRS payer? 2 marks
The CDS premium should, in theory, equal the bond credit spread. In practice, they are never
quite equal:
e) What are the principal reasons for the difference between them? 2 marks
Total for Q4: 12 marks
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