Boston Mock 2021 Level 3 PM Q27

CFA Level III
#1

See exhibit below:

“Brad Stevens, CFA, is the director of Fixed Income at Pinehurst Capital. He has been hired to manage a portfolio of fixed income bonds for Yankee Inc., a client of Pinehurst. Stevens has been asked to determine a strategy to retire Yankee’s debt liabilities over the next ten years. The liabilities have a market value of USD 750 million, a modified duration of 6.25 years and a BPV of USD 468,750. Yankee has just finalized a small asset sale and received USD 775 million of net proceeds to fund the new mandate. Stevens builds a portfolio of US government bonds to immunize the liabilities with a modified duration of 6.5 years and a BPV of USD 503,750. Pinehurst allows Stevens to use five-year Treasury futures to close the duration gap. The five-year Treasury note has a BPV per 100,000 in par value of 50.28 and a conversion factor of 0.77.”

For this question we have to work out how many futures contracts we have to purchase.

I get how the process works and what formula to use, my question is the extract says that the Treasury note has a BPV of 50.28. How do we know whether this refers to the BPV of the CTD or BPV of the futures contract?

My initial inclination was that this was the BPV of the future but the answer implies it refers to the CTD

Not sure if it’s just me or if it’s another situation of a question being poorly worded

Thanks

#2

In the vignette they say that:

So it is referred to the note and not to the future.

#3

My motto for this week - if they give us a conversion factor in a problem that involves bond bpv valuation, I’m gonna use that thang.

#4

Got it - so they mean CTD bond when they say treasury note

It would be a typical CFA trap to give us the BPV of what’s really the future (but made to look like the CTD) and the CF to make people mistakingly apply the CF

Many thanks

#5

Yep I’m gonna have to make sure I’m awake and alert on exam day so I don’t fall into any traps!

#6

Buddy I think we are all going to be stepping on many rakes during the exam lol. The key is to step on slightly fewer rakes than half our colleagues. This is what separates pass from fail in my opinion. I sincerely doubt anyone is smoking these tests empirically on game day. It’s a game of being within the top half or thereabouts, in a larger group that is getting hammered by trick wording, stress misreading and last - but not least - the simple reality that keeping this massive amount of information totally correct in your head is fairly impossible across the topic areas.

#7

haha I like that analogy. perfect way of putting it. Well good luck to both us in minimising the number of rakes we step on on exam day

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