...Fixed-Income Portfolio Selection Kay Giesecke∗ and Jack Kim† Stanford University June 29, 2009; this draft January 11, 2012‡ Abstract The equity portfolio selection problem is the subject of a substantial literature. Though equally important in practice, the selection problem for a fixed-income portfolio of corporate and government bonds, industrial loans and credit derivatives, is less well-understood. The fixed-income portfolio problem presents unique challenges: the risk of issuer default induces skewed return distributions, the correlation of defaults influences the tail of the portfolio return distribution, and credit derivative positions have complex risk/return implications. This paper addresses the static selection problem for a fixed-income portfolio. We optimize the total mark-to-market value of the portfolio at the investment horizon. This value incorporates the intermediate premium and default cash flows of long and short cash and derivative positions, and the survival-contingent market value of these positions at the horizon. The selection problem is cast as a polynomial goal program that involves a two-stage constrained optimization of preference weighted moments of the portfolio mark-to-market. The decision variable is the vector of contract notionals. A capital constraint guarantees the solvency of the investor. The multi-moment formulation addresses the non-Gaussian distribution of the portfolio mark-tomarket. It is also computationally tractable, because we obtain...
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...Financial Mathematics for Actuaries Chapter 8 Bond Management Learning Objectives 1. Macaulay duration and modified duration 2. Duration and interest-rate sensitivity 3. Convexity 4. Some rules for duration calculation 5. Asset-liability matching and immunization strategies 6. Target-date immunization and duration matching 7. Redington immunization and full immunization 8. Cases of nonflat term structure 2 8.1 Macaulay Duration and Modified Duration • Suppose an investor purchases a n-year semiannual coupon bond for P0 at time 0 and holds it until maturity. • As the amounts of the payments she receives are different at different times, one way to summarize the horizon is to consider the weighted average of the time of the cash flows. • We use the present values of the cash flows (not their nominal values) to compute the weights. • Consider an investment that generates cash flows of amount Ct at time t = 1, · · · , n, measured in payment periods. Suppose the rate of interest is i per payment period and the initial investment is P . 3 • We denote the present value of Ct by PV(Ct ), which is given by Ct . PV(Ct ) = t (1 + i) and we have P = n X (8.1) PV(Ct ). (8.2) t=1 • Using PV(Ct ) as the factor of proportion, we define the weighted average of the time of the cash flows, denoted by D, as D = = n X t=1 n X t " PV(Ct ) P twt , # (8.3) t=1 where PV(Ct ) wt = . P 4 (8.4) P •...
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...and 7-13 Problems (Show your work.): 7-46, 8-34, and 8-40 Chp.7. 7. Differentiate between the following: active income, passive income, and portfolio income. Sol. 1.Active Income Income an individual earns through participating in some activity with the goal of earning income. Also referred to as earned income. 2.Passive Income Income earned through a trade or investment in which the individual does through little or no effort. Ex:Rental property income managed by management company. 3.Portfolio Income Income is derived directly from investments such as stock earnings, mutual fund investments, or interest income. 13. Briefly, what is "material participation"? Why is the determination of whether a taxpayer materially participates important? Sol. Material participation is the point at which an individual becomes Actively or Continuously involved in a project . Earned revenue from the project is no longer considered passive income. This is important as this determines whether income is active or passive inconsideration of how loses are deducted and how this income is taxed. 46. Mary Beth is a CPA, devoting 3,000 hours per year to her practice. She also owns an office building in which she rents out space to tenants. She devotes none of her time to the management of the office building. She has a property management firm make all management decisions for her. During 2011, she incurred a loss, for tax purposes, of $30,000 on the office building. How must...
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...accounting standards.” (263) PAT uses theory to predict the choices that management will make regarding their choice of accounting policies. This theory is introduced as a way to merge efficient securities markets with economic consequences. PAT takes the view that firms will conduct themselves in the way that maximizes their own best interests. Managers do not always do what is best for shareholders, but what will be the most beneficial to their organization. The choices that an organization makes are dependent on what industry they are in, and the factors within that industry An organization can be portrayed by the contracts it enters into. A firm’s contracts with employees, suppliers, lenders, and shareholders are central to its operations. The organization is inclined to keep these contract costs as low as possible. PAT emphasizes that an organization’s choice of accounting policies is motivated by keeping contract costs down. PAT does not propose that organizations completely identify what accounting policies they will use. Such specification is costly to commit to, and does not give management the opportunity to respond to unforeseen circumstances. Managers have flexibility to choose from a set of accounting policies, and these options let them choose the policies that are the most beneficial to them. The most favourable accounting policies are a balance of minimal costs, and flexibility to give management the option of changing policies in response to changes in their external...
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...standards.” (263) PAT uses theory to predict the choices that management will make regarding their choice of accounting policies. This theory is introduced as a way to merge efficient securities markets with economic consequences. PAT takes the view that firms will conduct themselves in the way that maximizes their own best interests. Managers do not always do what is best for shareholders, but what will be the most beneficial to their organization. The choices that an organization makes are dependant on what industry they are in, and the factors within that industry. An organization can be portrayed by the contracts it enters into. A firm’s contracts with employees, suppliers, lenders, and shareholders are central to its operations. The organization is inclined to keep these contract costs as low as possible. PAT emphasizes that an organization’s choice of accounting policies is motivated by keeping contract costs down. PAT does not propose that organizations completely identify what accounting policies they will use. Such specification is costly to commit to, and does not give management the opportunity to respond to unforeseen circumstances. Managers have flexibility to choose from a set of accounting policies, and these options let them choose the policies that are the most beneficial to them. The most favourable accounting policies are a balance of minimal costs, and flexibility to give management the option of changing policies in response to changes in...
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...Case Study: The Cross Country Group Introduction Sidney Wolk is the founder of The Cross-Country Group which, over the years, he has turned from a small enterprise into one of the largest privately held service companies of its kind in North America. The company mainly operates in the field of roadside and housing services a provider a private label services. As a deeply involved manager, he leaned towards individuals instead of a formal compensation scheme for many years. When his two sons, Howard and Jeffrey joined the business, they saw the necessity to turn their father’s rather spontaneous and unpredictable compensation style into a more professionalized and transparent approach. This gave rise to the LEAP plan which will be discussed in detail during the course of this case study. While certainly being more sophisticated than the earlier compensation practices, two executive employees, Bruce Henderson and Martin Wong, did not fully agree with the overall concept of the LEAP plan. As part of the “Before You Move” subsidiary, they are in charge to manage a rather dynamic and unpredictable business which requires a high degree of entrepreneurial spirit and creative leadership. To better align the compensation plan to the specific circumstances of this particular business, they bring forward a counter proposal which is would result in a partial ownership of equity after having achieved the set goals, which differs from the initial LEAP plan where the compensation...
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...assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. The return of assets is calculated by dividing the net income of the company in one year by the total assets of that same year. Expressed in percentage net incometotal assets · Return of equity (ROE): this ratio, measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested. ROE is calculated by dividing the net income over the total equity on the company. Expressed in percentage. net incometotal equity · Return of sales (ROS): this ratio is used to evaluate a company's operational efficiency. This measure is helpful to management, providing insight into how much profit is being produced per dollar or euro of sales. The return of sales is calculated by dividing the net income before taxes and interest over the total sales. Expressed in percentage. net income (before taxes and interest)total sales 3.2 Heineken ROA ROE ROS. All the values are in millions of euros, excepted for the percentages. 1. ROA: the net income in 2014 for Heineken was 1516 million euros, and the total assets were 34348 million euros. 151634348*100=4.41% Last year’s return of assets for Heineken was 4.41%. 2. ROE: the total equity in 2014 for Heineken was 11402 million euros. 151611402*100=13.3% Last year’s return of equity for Heineken was 13.3%. 3. ROS: the net income before taxes and interest in 2014 was 2440 million...
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...for organization as well as difficult to compare. * Allocation of Common Costs: Common costs are likely to be allocated, bringing segment information into question * Pricing Inter-segment Transaction: No specific method for inter-segment pricing, different method use for cost, cost plus market price and negotiable price. * Costs of Segment Disclosure: Increased competition may result segmental disclosures where profitable segment may attract competitors, & loss making segment arise the take over situation. Foreign companies are not required to provide segmental reports. * Management Conservatism: Management determination of segments implies that what is useful to management is useful to investors. FASB’s 5 possible objective for interim reporting: 1. To estimate annual earnings 2. To make projections 3. To identify turning points 4. To evaluate Management Performance 5. To supplement the annual Report. Problems in Interim Reporting * Accounting Problems: * Inventory Problems: There are three types of problems; * Determination of Inventory quantities * Valuation of inventories * Adjustment of valuation * Matching principle: Business operations are not similar throughout the year. Resources are acquired & output may be sold & there are many types of cost which related with these issues. It should defer in an interim period costs if the benefits extend beyond that period. * Extent of disclosure...
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...Earnings | 26,800 | 80,000 | Total Equities | | $124,000 | The following transactions are each independent transactions. a) On March 1, 2013, a long-time debtholder has agreed to convert $20,000 of his debt to 1,000 Preferred shares with a paid up capital of $22,000. Assume that S. 51 of the Income Tax is not applicable. On April 1, 2013, a different shareholder with 500 Preferred Shares sold them for $11,000 in an arm’s length transaction. He had purchased the shares for $8,200 in 2011. b) A different investor owns 200 of the common shares which he had purchased in 2009 for $20 per share. The company redeems them at a price of $44 per share. c) In return for assets with a fair market value of $35,000, the company issued a demand note for $24,000 and 500 fully paid Preferred Shares having a per share Paid Up Capital equal to those currently outstanding. d) The company paid and distributed a 5 percent stock dividend on the common shares. An addition was made to paid up capital of $1,560 with retained earnings reduced accordingly. Required: Describe fully the tax consequences of the above independent transactions. Ensure to include any changes to the taxpayers’ income as well as any changes to adjusted cost bases that the shareholder still owns after the transaction. Question 2: Joan Moffat is a successful accountant located in downtown Toronto. She has been talking to her financial planner and on January 1, 2013 she set up...
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...license the compound. Under this agreement, Merck would be responsible for the approval of Davanrik, its manufacture, and its marketing. The company would pay LAB an initial fee, a royalty on all sales, and make additional payments as Davanrik completed each stage of the approval process. Merck In 2000, Merck & Co., Inc. was a global research-driven pharmaceutical company that discovers, develops, manufactures and markets a broad range of human and animal health products, directly and through its joint ventures, and provides pharmaceutical benefit management services (PBM) through Merck-Medco Managed Care. Since 1995, Merck had launched 15 new products including Vioxx™ for the treatment of osteoarthritis, Fosamax™ for the treatment of osteoporosis and Singulair™ for treating asthma. The Company earned $5.9 billion on 1999 sales1 of $32.7 billion, about a 20% increase from 1998. Exhibits 1 and 2 contain Merck’s Income Statement and Balance Sheet. A handful of Merck’s most popular drugs, Vasotec™, Mevacor™, Prinivil™, and Pepcid™, generated $5.7 billion in worldwide sales. The patents for these drugs, however, would expire by 20022. Once the patents expired, Merck anticipated that the sales of these drugs would decline substantially as generic substitutes became available. The only way to...
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...the value of a ratio over time to see if it is improving or deteriorating. Example: "The analysis of financial information, trend analysis is the presentation of amounts as a percentage of a base year. Example: The trend of a company’s revenues, net income, and number of clients during the years 2001 through 2007, trend analysis will present 2001 as the base year and the 2001 amounts will be restated to be 100. The amounts for the years 2002 through 2007 will be presented as the percentages of the 2001 amounts. In other words, each year’s amounts will be divided by the 2001 amounts and the resulting percentage will be presented. For example, revenues for the years 2001 through 2007 might have been $31,691,000; $40,930,000; $50,704,00; $63,891,000; $79,341,000; $101,154,000; $120,200,000. These revenue amounts will be restated to be 100, 129, 160, 202, 250, 319, and 379. Let’s assume that the net income amounts divided by the 2001 amount ended up as 100, 147, 206, 253, 343, 467, and 423. The number of clients when divided by the base year amount are 100, 122, 149, 184, 229, 277, and 317. From this trend analysis we can see that revenues in 2007 were 379% of the 2001 revenues, net income in 2007 was 467% of the 2001 net income, and the number of clients in 2007 was 317% of the number in 2001. Using the restated amounts from trend analysis makes it much easier to see how effective and efficient the company has been during the recent years". Trend analysis can also include the...
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...forwards, options, and spot deferred contracts) used to manage price risk. In 1992 the management of American Barrick is pleasantly surprised by unexpected new gold finds, but this new production places demands on the firm's hedging program and tests the firm's commitment to hedging when prices of gold and of many hedging vehicles are unattractive. The gold mining industry has been heavily impacted by the fluctuating gold prices and continuously rising operating costs. Hedging gold prices has become important to ensure financial stability in a sector where mines are unprofitable due to high volatility. Through this case we question the value created by hedging and analyse various instruments to decide upon the best available instrument to Barrick. In this document we explore: 1. Popular theories of hedging and focus on hedging in the gold industry. 2. Analyse features and risk of the gold hedging program at Barrick. 3. Analyse characteristics of Barrick’s gold hedging program. In this document we conclude that value of hedging gold prices creates value for shareholders especially when other firms remain exposed. * The firm has been able to expand almost continuously when others are cutting back. * Barrick’s ability to protect its investment allows it to acquire other under-priced or distressed assets in low gold price periods. Barrick also practices hedging of accounting income which is a suspect. This along with their frequent change of hedging practices leads...
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...Article NMIAL doubles advertising revenue, adds new concessions Published: Sunday | September 9, 2012 NMIA Airports Limited (NMIAL) is reporting a 20.55 per cent improvement in non-aeronautical revenue (NAR) for fiscal year 2011-2012 on the back of improved income from concessions and advertising. NMIAL is the Airports Authority of Jamaica subsidiary that operates the Norman Manley International Airport. The airport company earned US$14.76 million in non-aeronautical up from US$12.24 million in the previous fiscal year. NMIAL plans to spend some US$6 million will be spent in the coming fiscal year on capital improvement projects, according to Senior Director of Commercial Development and Planning Alfred McDonald. With respect to NAR-generating projects, new plans for the current fiscal year include tendering for additional retail and food concessions, as well as a sports bar. "Other plans are in progress to attract more non-travellers to the airport for information and entertainment. These plans are in their embryonic stages," said McDonald. NMIA Airport is a wholly owned subsidiary of Airports Authority of Jamaica (AAJ) which was incorporated in 2003. It operates NMIA under a 30-year concession agreement with AAJ. The arrangement is expected to be set aside once the state-owned airport is privatised. NMIAL collects most of it commercial revenue from concession fees collected from non-fuel retailers. The rental of retail space brought in 24 per cent more revenue,...
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...i) Assume an immediate and sustained 1 percent across-the-board rise in interest rates. Based on a review of Exhibit 3, discuss how one would use interest rate-sensitivity gap information to estimate the impact of rising interest rates on the earning of Norwest Corporation. Interest rate-sensitivity gap information serves as a preparatory tool for Norwest Corporation to estimate the impact of rising interest rates on their earnings. It is most popular interest rate hedging strategy use in today which is require management to perform an analysis of the maturities and repricing opportunities associated with interest-bearing assets and deposits and other borrowings. Periodic GAP is compares interest sensitive assets with interest sensitive liabilities across each of the different time bucket and in a measure of the timing of changes in interest rates on net interest income. The Gap of the corporation is mostly positive for all the time periods except for the investments that are of less than six month maturity. A Positive GAP such as in the 6 months-1 year through 5 years shown that Norwest Corporation has more interest sensitive assets than interest sensitive liabilities. When interest rate rise of 1 percent during the time interval, this holding company’s net interest margin will increase because the interest revenue generated by assets will increase more than cost of borrowed funds. In contrast, a negative GAP such as shown in Exhibit 3 the period within 6 months indicates...
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...pwc.com.au/mba PwC analysis of the major banks results for full year 2012 Modest growth, potential for more ... The most recent Australian bank results show the extent of headwinds facing the Australian banks. After two years of double-digit profit growth, underlying cash earnings rose by only 3.6% in 2012. All of that growth came early in the year; with profit showing no growth in the second six months compared to the first half-year. At the same time, the banks continued to strengthen their capital base with average shareholder funds rising by 8.5% in 2012 compared to 2011, so that return on equity (RoE) fell from 16.4% in 2011 to 15.6% in 2012, reinforcing our long-held view that bank RoEs are in transition to an era where 15% will set the upper bound, not the lower bound, for Australian bank average RoEs. This cautious outlook is reinforced by global developments since our last report six months ago, and in particular that global growth expectations have been revised downwards, leading to further monetary policy easing across the globe, including in Australia. At the same time ECB President Draghi’s commitment in July to do “whatever it takes” marked a much more constructive period for dealing with Eurozone concerns and supporting lower risk yields in many markets including wholesale funding markets for our banks over the past few months. The in-principle agreement to create a Eurozone banking union is a tangible sign of meaningful change. Domestically, the main...
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