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

question 2

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 note 2, rosaiso is the only fund for which the expected change in price based on the investor's views of yields and yield spreads should be calculated using:

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