The Following Information Relates to Questions 1-6
Cécile Perreaux Is

question 11

Multiple Choice

The following information relates to Questions 1-6
Cécile Perreaux is a junior analyst for an international wealth management firm. her supervi-sor, Margit daasvand, asks Perreaux to evaluate three fixed-income funds as part of the firm's global fixed-income offerings. Selected financial data for the funds aschel, Permot, and rosaiso are presented in exhibit 1. in Perreaux's initial review, she assumes that there is no reinvestment income and that the yield curve remains unchanged.
EXHIBIT 1 Selected Data on Fixed-Income Funds
$\begin{array}{l}\begin{array}{lr}&\text { Aschel }\\\hline \text { Current average bond price } & \$ 117.00 \\\text { Expected average bond price in one year (end of Year 1) } & \$ 114.00 \\\text { Average modified duration } & 7.07 \\\text { Average annual coupon payment } & \$ 3.63 \\\text { Present value of portfolio's assets (millions) } & \$ 136.33 \\\text { Bond type* } & \\\text { Fixed-coupon bonds } & 95 \% \\\text { Floating-coupon bonds } & 2 \% \\\text { Inflation-linked bonds } & 3 \% \\\text { Quality* } & \\\text { AAA } & 65 \% \\\text { BBB } & 35 \%\end{array}\begin{array}{rr}\text { Permot } & \text { Rosaiso } \\\hline \$ 91.50 & \$ 94.60 \\\$ 96.00 & \$ 97.00 \\7.38 & 6.99 \\\$ 6.07 & \$ 6.36 \\\$ 68.50 & \$ 74.38\\\\38 \% & 62 \% \\34 \% & 17 \% \\28 \% & 21 \%\\\\15 \% & 20 \% \\65 \% & 50 \%\\&\text { (continued) }\end{array}\end{array}$


after further review of the composition of each of the funds, Perreaux notes the following.
note 1: aschel is the only fund of the three that uses leverage.note 2: rosaiso is the only fund of the three that holds a significant number of bonds with embedded options.daasvand asks Perreaux to analyze immunization approaches to liability-based mandates for a meeting with villash foundation. villash foundation is a tax-exempt client. Prior to the meeting, Perreaux identifies what she considers to be two key features of a cash flow-matching approach.
feature 1: it requires no yield curve assumptions.
feature 2: Cash flows come from coupons and liquidating bond portfolio positions.two years later, daasvand learns that villash foundation needs $5,000,000 in cash to meet liabilities. She asks Perreaux to analyze two bonds for possible liquidation. Selected data
on the two bonds are presented in exhibit 2.
$$\text { EXHIBIT } 2 \text { Selected Data for Bonds } 1 \text { and } 2$$

$\begin{array}{l}\begin{array}{lc}&\text { Bond } 1\\\hline \text { Current market value } & \$ 5,000,000 \\\text { Capital gain/loss } & 400,000 \\\text { Coupon rate } & 2.05 \% \\\text { Remaining maturity } & 8 \text { years } \\\text { Investment view } & \text { Overvalued } \\\text { Income tax rate } & \\\text { Capital gains tax rate }\end{array}\begin{array}{cc} & \text { Bond 2 } \\\hline& \$ 5,000,000 \\& -400,000 \\& 2.05 \% \\& 8 \text { years } \\& \text { Undervalued } \\39 \% & \\30 \% &\\\end{array}\end{array}$
-based on exhibit 2, the optimal strategy to meet villash foundation's cash needs is the sale of:

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Definitions:

Financial Statement

A formal record of the financial activities and position of a business, person, or other entity, typically including income statement, balance sheet, and cash flow statement.

Permanent/Temporary

Terms used to differentiate between accounts that remain open over fiscal periods (permanent) and those closed at the end of a period (temporary).

Normal Balance

The side of an account (debit or credit) on which increases in the account are recorded, depending on the account type.

Financial Statement

Reports that provide an overview of a company's financial condition at a specific time, including income statement, balance sheet, and cash flow statement.