The Following Information Relates to Questions

question 13

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.
-The effects of a non-parallel shift in the yield curve on Strategy 2 can be reduced by:

• A) minimizing the convexity of the bond portfolio.
• B) maximizing the cash flow yield of the bond portfolio.
• C) minimizing the difference between liability duration and bond-portfolio duration.

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Definitions:

Property Tax

Property tax is a levy imposed by a government on a property owner, based on the value of the property.

Manufacturing Costs Incurred

The total expenses involved in the manufacturing process, including direct materials, direct labor, and overhead costs.

Beginning Work in Process

The value of partially completed goods that are in production at the start of an accounting period.

Cost of Goods Manufactured

The sum of expenses for materials, labor, and overhead for goods finished in a given timeframe.