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The Following Information Relates to Questions

question 17

Multiple Choice

The following information relates to Questions
Doug Kepler, the newly hired chief financial officer for the City of radford, asks the dep-uty financial manager, hui ng, to prepare an analysis of the current investment portfolio and the city's current and future obligations. The city has multiple liabilities of different amounts and maturities relating to the pension fund, infrastructure repairs, and various other obligations. ng observes that the current fixed-income portfolio is structured to match the duration of each liability. Previously, this structure caused the city to access a line of credit for temporary mismatches resulting from changes in the term structure of interest rates.
Kepler asks ng for different strategies to manage the interest rate risk of the city's fixed-income investment portfolio against one-time shifts in the yield curve. ng considers two different strategies:
Strategy 1: immunization of the single liabilities using zero-coupon bonds held to maturity.
Strategy 2: immunization of the single liabilities using coupon-bearing bonds while continuously matching duration. The city also manages a separate, smaller bond portfolio for the radford School District. During the next five years, the school district has obligations for school expansions and ren- ovations. The funds needed for those obligations are invested in the loomberg barclays US aggregate index. Kepler asks ng which portfolio management strategy would be most efficient in mimicking this index.
a radford School board member has stated that she prefers a bond portfolio structure that provides diversification over time, as well as liquidity. in addressing the board member's
inquiry, ng examines a bullet portfolio, a barbell portfolio, and a laddered portfolio.
-a disadvantage of Strategy 1 is that:

Grasp the concept of basis risk and its relevance in the hedging process.

Understand cross-hedging and its application to manage risk in financial operations.

Define and recognize the dynamics of interest rate collars and their use in interest rate risk management.

Understand the foundational concepts of Freud's psychoanalytic theory, including the structure of personality (id, ego, superego).

Definitions:

Issues Management

The process by which an organization identifies and resolves issues of public concern that may impact its ability to operate effectively.

Preparing

The act of making something ready for use or consideration.

Analyzing Historical

The process of examining past events and contexts to understand their causes, effects, and significance.

Reputation Building

The strategic process of managing and improving how an organization is perceived by others to gain trust and respect.