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5 May 2018

The Consumer Financial Protection Bureau was created with the oversight authority necessary to ensure that

consumer financial markets work.

the prices and risks for credit products and other consumer financial services are easy to understand.

the prices and risks for mortgages, credit cards, and other kinds of financial products and services are clear.

All of these.

TRUE OR FALSE

A subprime mortgage is a mortgage with an APR below the prime rate.

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Reid Wolff
Reid WolffLv2
7 May 2018

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Please comment on the discussion board comment below: The board initial question was: Cite two different company examples of the internet being used as an international marketing tool. What are the advantages in each case? Are there any disadvantages?

Dollar Shave Club & Mint

"Today the internet provide company many tools to successfully market their products or services that they offer. I choose Dollar Shave Club and Mint as the two companies that use the internet as an international marketing tool.

Dollar Shave Club is fairly a new company comparing to the other big names in the shaving industry and Michael Dubin co-founder and CEO of Dollar Shave Club post a video on YouTube making a bold statement that their $1.00 razor is great, the video went viral and sold about 12,000 razors. Today the same video has been viewed by 24 million times. The video only cost $4,500 to make yet it was a bid success in YouTube. Investors who saw the potential of the Dollar Shave Club company quickly invested in the company. Dollar shave Club company is very active in social media and customers love to post pictures of their monthly boxes from the company.

Mint is a personal financial company that currently offer free service in US and Canada. Mint allow customer to track expenses in bank accounts, credit cards, investment, and mortgage accounts. It also allows user to create budgets and financial goals. Mint use a varieties of social media platform like Facebook, Twitter, YouTube, Google+, and Instagram to interact with their customer and as the same time it is form of marketing.

The advantage and disadvantage is the same for both company. Dollar Shave Club and Mint use the internet to grow their customer and this type of marketing workout well for both company. One major disadvantage is they fail to meet their customer need, social media make it easy for customer to voice their concerns."

Derivative

Vanguard High Yield Corporate Fund
Materials
• Website information (23/05/2016)
https://personal.vanguard.com/us/funds/snapshot?FundId=0029&FundIntExt=INT
• Summary Prospectus (27/05/2015)
• Prospectus (27/05/2015)
Anakin’s Job
In May 2016, Anakin leaves his job in Hollywood and returned to the finance industry. It is his
first love after all and the industry appears to be picking up again after the credit crunch of
2007-2008. He applies to be the risk analyst to the fund manager of the Vanguard High Yield
Corporate Fund as his quantitative training positions him well for a job that requires ever more
numerical and computational skills over the years. His solid background in applied analytics
in business management and humble demeanour help him clinch the post without much
difficulty.
The Vanguard Group is an American investment company that has approximately USD 3
trillion in asset-under-management. It is founded in 1975 by John Bogle who created the first
index fund (tied to the S&P 500 index) in the process. After an initial lull, the index grew
rapidly along with the bull market of the 1980s. The Group has since added various financial
services and products to its core business, particularly the ETFs.
Anakin is tasked by the fund manager to become thoroughly familiar with the structure of the
fund as is documented by files provided under “Materials”. After that, he is to assess the
exposure of the High Yield Corporate Fund to risks in the market. He seeks the opinion of
Darth who is a veteran market analyst with the Vanguard Guard group for over 20 years.
Outlook
Darth has this to say about the economy and fixed income market:
" The US economy is improving steadily. It will not be long before the Fed decides to raise
interest rates. Once the Fed restarts the regime of rising rates, it will about 2 years for the yield
curve to rise by 100 basis points.
Consequently, in the more stringent economic environment, companies of lower credit
qualities, namely those of Caa and below, are expected to have their credit standing further
eroded. There is a 25% chance that a Caa-rated issuer may go into default and another 25%
chance that it may be downgraded to C.
The Greek debt problem, though much stabilized than before, is still a matter of grave concern
for the Eurozone. Expect the euro to depreciate against the dollar over the course of the next 6
months. A fall of 500 pips will not be a surprise. "
Assume Anakins’ role and answer the following questions. Questions 1 and 2 concern the
Financial Environment. The Environment at large provides the context and sets the constraints
within which financial decisions are weighed and taken. Questions 3 and 4 pertain to the task
that Anakin needs to complete.

Question 1
Describe the types of mutual funds that can be found in the market in a concise and systematic
manner, suitable for presenting to a group of investors who are high net worth and impatient.
(25 marks)
Question 2
Collect data (e.g. from the internet and/or Eikon) to plot the term structures of bond yields.
Each term structure describes the state of the fixed income market for bonds of the credit quality
corresponding to that curve. The different term structures span the space of bonds across credit
qualities and maturities.
Analyse the states of these markets relative to the shape of the curves. Compare and contrast
your analysis with current market views.
Explain your steps, present your answers and quote your sources clearly.
(25 marks)
Question 3
To better understand the structure of the fund, answer the following questions:
(a) Describe the composition of the fund.
(b) What are the risks faced by the fund according to the prospectus? Analyse the nature of
the portfolio risk accordingly and comment on whether commodity price risk and equity
price risk matter to the fund management.
(c) Discuss the performance of the fund based on the financial numbers provided.
(d) Assess the quality of the management of the fund.
(25 marks)
Question 4
The fund is affected by changes in the financial markets. When interest rates rise, the value of
the portfolio falls. Occurrences that are flagged by the rating agency to be credit events can
result in the downgrading of credit rating of bond issuers. Bonds that denominated in foreign
currency are affected by fluctuations in the foreign exchange market.
(a) Analyse generally the need for hedging the various market risks for the fund.

Take into account Darth’s outlook. Address some of these risk concerns by answering the
following question:
(b) Suppose that in the coming 2 years, the prevailing interest rates are expected to go up
by 100 basis points and you are concerned. Show how you could hedge away the
interest rate risk by using an interest rate swap, assuming that the fund by may
represented by a single 5-year par bond on the $18.4 billion net assets with semi-annual
5% coupon payments starting from the current date.
In your explanation, you may assume a scenario in which a flat yield curve increases
uniformly across all terms by 25 basis points per half-a-year.
(c) Credit default swaps may be used to ameliorate credit risk. Appraise the use of such
option-like derivative instruments in managing the risk of the portfolio by explaining
how such instruments function.

Multiple Choice Quiz
PLS EXPLAIN ALL YOUR ANSWERS
1
If a bond's rating improves:
A) It should cause the bond's price and yield to increase, allother factors constant.
B) It should cause the bond's price and yield to decrease, allother factors constant.
C) It should cause the bond's price to increase and its yield todecrease, all other factors constant.
D) None of the above.



2
An investor earning 6% from a tax-exempt bond, who is in a 25% taxbracket, holding risk constant:
A) Would be indifferent to a taxable bond with a 7.5% yield.
B) Would be indifferent to a taxable bond with a 8.0% yield.
C) Would be indifferent to a taxable bond with a 4.5% yield.
D) None of the above.



3
When the yield curve is downward sloping:
A) People are expecting an economic slowdown.
B) Short term yields are lower than long term yields.
C) This is impossible, since the yield curve always slopesupward.
D) People could be expecting a loosening in monetary policy.



4
Assume the Expectation Hypothesis regarding the term structure ofinterest rates. If the current one-year interest rate is 4% and thecurrent two-year interest rate is 6%, then:
A) Investors are expecting the future one-year rate to be 4%.
B) Investors are expecting the future one-year rate to be 8%.
C) Investors are expecting the future one-year rate to be 6%.
D) None of the above.



5
Which of the following statements is(are) true?
A) Conforming mortgages are mortgages for which the borrowers donot meet standards of creditworthiness.
B) Subprime mortgages are often made to individuals with low creditscores or income levels that are relatively low when compared tothe price of the home.
C) Subprime mortgages are never used in mortgage backed securitiesbecause of their riskiness.
D) All of the above.



6
Assume an investor has a choice of 3 consecutive one-year bonds orone 3-year bond. Assuming the Expectations Hypothesis of the termstructure of interest rates:
A) The average interest rate of the three consecutive one-yearbonds should be less than the 3-year bond to reflect the riskpremium.
B) The interest rate of the 3-year bond should equal the averageinterest rate of the 3 one-year bonds.
C) The three consecutive one-year bonds must have the same interestrate.
D) The current one-year interest rate must equal the current 3-yearinterest rate.



7
We would expect the risk spread between Baa bonds and U.S. Treasurysecurities of the same maturities to:
A) Widen during periods of economic recession.
B) To remain relatively constant over the business cycle.
C) To decrease during economic slowdowns.
D) To increase during economic growth periods.



8
Increased borrowing by the U.S. Treasury to finance growing budgetdeficits will:
A) Result in U.S. Treasury yields being higher than high gradecorporate bonds.
B) Result in the price of U.S. Treasury bonds rising.
C) Cause the yield on U.S. Treasury bonds to increase, but still belower than corporate bonds.
D) Result in lower yields on corporate bonds.



9
Imagine a scandal that finds the officers of bond rating agencieshave been taking bribes to inflate the rating of specific bonds.This should:
A) Have no impact on the bond market since bond markets are highlyefficient.
B) Decrease the demand for all bonds.
C) Increase the demand for U.S. Treasury securities and decreasethe demand for corporate bonds.
D) Decrease the risk spread.



10
A proposed increase in the federal income tax rates may actually beviewed favorably by many mayors of cities because:
A) It will allow them to also raise their tax rates.
B) It will cause the demand for Municipal bonds to increase andtheir yields to increase.
C) People will pay less attention to local taxes.
D) It will cause the price of municipal bonds to increase and theiryields to decrease.



11
Bonds rated as "highly speculative":
A) Are rated so because they guarantee high returns for thebuyer.
B) Are commonly referred to as junk bonds.
C) Are ranked just below investment grade by Standard &Poor's.
D) Are rated so because they do not have any default risk.



12
Ratings problems contributed to the financial crisis of 2007-2009because:
A) Ratings agencies sharply downgraded the ratings of MBS ashousing prices declined, reinforcing the decline in the prices ofMBS.
B) MBS issuers consulted ratings agencies to structure MBS to getthe highest ratings, causing a conflict of interest.
C) Ratings agencies were compensated by the issuers of the MBS,causing the incentive for favorable ratings.
D) All of the above.



13
An investor in a 30% marginal tax bracket, earning $10 in interestannually for a $100 U.S. Treasury bond:
A) Earns a 10% after-tax return because interest on U.S. Treasurybonds is tax exempt at the federal level.
B) Earns a 3% return after-tax.
C) Would be indifferent between this bond and a municipal bondoffering $7 annually per $100 of face value, assuming the samedefault risk.
D) Earns a 1% return after-tax.



14
Commercial paper refers to:
A) The financial publications read by the CEO's of publiccorporations.
B) Any debt security with a maturity exceeding one year.
C) Short-term collateralized securities issued only bycorporations.
D) Unsecured short-term debt issued by corporations andgovernments.



15
The addition of the Liquidity Premium Theory to the ExpectationsHypothesis allows us to explain why:
A) Yield curves usually slope upward.
B) Interest rates on bonds of different maturities movetogether.
C) Long-term interest rates are less volatile than short terminterest rates.
D) Yield curves are flat.


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