2. At the present time, you expect a decline in interest rates and must choose between twoportfolios of bonds with the following characteristics:Portfolio BPortfolio A10.0 yrs10.5 yrsAverage maturityAverage YTMModified duration10%7%4.9 yrs5.7 yrs40.30125.18ConvexityCall featuresDeferred call features that rangefrom 1 to 3 yearsNoncallableSelect one of the portfolios and discuss three factors that would justify your selection.

Modified duration is used to determine how much the price of a bond will rise or fall for each…

Answered: 2. At the present time, you expect a…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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A second version of the Markowitz portfolio model maximizes expected return subject to a constraint that the variance of the portfolio must be less than or equal to some specified amount. Consider the Hauck Financial Service data. Click on the datafile logo to reference the data. Annual Return (%) Mutual Fund Year 1 Year 2 Year 3 Year 4 Year 5 Foreign Stock 10.06 13.12 13.47 45.42 -21.93 Intermediate-Term Bond 17.64 3.25 7.51 -1.33 7.36 Large-Cap Growth 32.41 18.71 33.28 41.46 -23.26 Large-Cap Value 32.36 20.61 12.93 7.06 -5.37 Small-Cap Growth 33.44 19.40 3.85 58.68 -9.02 Small-Cap Value 24.56 25.32 -6.70 5.43 17.31 (a) Construct this version of the Markowitz model for a maximum variance of 38. Let: FS = proportion of portfolio invested in the foreign stock mutual fund IB = proportion of portfolio invested in the intermediate-term bond fund LG = proportion of portfolio invested in the large-cap growth fund LV = proportion of portfolio invested in the large-cap value fund SG =…
9. Interest Rate Risk. Suppose that you are a fixed income portfolio manager at Bourbon Street Capital. You have the following bonds issued by Royal, Inc. and Chartres, LLC in your portfolio and you want to understand the risk profile of your portfolio. Given that both bonds pay semiannual coupons, answer the following questions. (Remember to convert your answer to units of full years.) Coupon Yield to maturity Maturity (years) Royal, Inc. Chartres, LLC. Bond A Bond B 9% 8% 5 $100.00 $104.055 8% 8% 2 Par $100.00 Price $100.00 (a) What is the DV01 (at current prices) for bonds A and B? (b) What are the Macaulay Durations (at current prices) for the two bonds? (c) What are the modified durations for the two bonds? (d) What is the convexity of the two bonds?
1. What is your expected portfolio return of an investment portfolio with a 60/40 allocation of stocks and bonds, respectively, if you expect long term equities to return 8%, and long term bonds to return 2%? 5.6% 6.2% 4.8% 5.1% 2. You are looking into developing your first investment portfolio. After assessing your risk tolerance, you believe that an 90/10 allocation of stocks and bonds, respectively, is where you want to begin. You believe that 7% is what stocks will return over the next ten years, and 4% is what you expect to return in your bond portfolio. If you invest $300/month for the next ten years, what will your portfolio be worth? $51,077 $47,579 $52,843 $44,880
Q2. Consider 3 zero coupon bond: Maturity Yld: 10 1.50%; 20 2.00%; 30 2.25% Q2a. calculate duration and convexity, dollar duration and dollar convexity for all three Q2b. how to hedge the duration risk of a 100M position in 20Y with 10Y and with 30Y respectively? Q2c. What is the dur and convexity effect of 5 bps steepening caused by 10Y up 10 bps; 20Y up 15 bps for the 10 vs 20Y trade?? Q2d. What is the dur and convexity effect of 5 bps flattening caused by 20Y up 15 bps; 30Y up 10 bps for the 20 vs 30Y trade?
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You must make a choice between the following three sets of non-callable bonds. Foreach set, select the bond that would be best for your portfolio, given your interest rate outlook and the consequent strategy set forth in Part a. In each case, briefly discuss why you selected the bond. Bond Maturity Coupon Yield to MaturitySet 1 A 20 years 10% 10% B 20 years 6% 8%Set 2 C 20 years 6% 10% D 15 years 8% 10%Set 3 E 17 years 12% 12% F 20 years 12% 8%
Duration and price sensitivity a) Calculate the duration and modified duration of a bond with a face of $1,000, a 6% coupon rate, and a 5% YTM with 1 payment per year and a maturity of 10 years, using the Excel DURATION and MDURATION formulas. b) Calculate the following: 1. What are the approximate percentage and dollar changes in price for a 1% change in interest rates using the duration approximation formula? 2. What are the actual percentage and dollar changes in price if interest rates increase by 1%?
Unlike the coupon interest rate, which is fixed, a bond's yield varies from day to day depending on market conditions. To be most useful, it should give us an estimate of the rate of return an investor would earn if that investor purchased the bond today and held it for its remaining life. There are three different yield calculations: Current yield, yield to maturity, and yield to call. A bond's current yield is calculated as the annual interest payment divided by the current price. Unlike the yield to maturity or the yield to call, it does not represent the actual return that investors should expect because it does not account for the capital gain or loss that will be realized if the bond is held until it matures or is called. This yield was popular before calculators and computers came along because it was easy to calculate; however, because it can be misleading, the yield to maturity and yield to call are more relevant. The yield to maturity (YTM) is the rate of return earned on a…
Evaluate the American bond yield curve below. Utilising an adequate theoretical lens, explain what the yield curve indicates about the direction of future interest rates, and what this could mean about future lending decisions
Consider the characteristics of two annual pay bonds from the same issuer with the same priority in the event of default: You also observe the following spot interest rates from the current yield curve: Par value Coupons Maturity Coupon rate Yield to maturity Price Bond A $100 Annual 3 yrs 8% 10.25% 94.43 1 2 3 Bond B $100 Annual 3 yrs 4% 10.35% 84.31 Term (yrs) Spot Rates (zero coupon, %) 4% 7 10 Neither bond's price is consistent with the spot rates. Using the information in these displays, recommend either Bond A or Bond B for purchase. Justify your choice. Do not round intermediate calculations. Round your answers to the nearest cent. The non-arbitrage price of Bond A: $ The non-arbitrage price of Bond B: $ -Select- ✓ appears to be the better purchase.
Consider a portfolio of bonds that have an average default rate of 1%. The correlation between normalized default times for these bonds is 0.14. What is the 99.9% worst-case default rate for this bond portfolio? Note: Your answer must be expressed in percentage terms and accurate to within 0.16.
Portfolio rebalancing is the process of bringing your different asset classes (stocks, bonds, and cash) back into proper relationship following a significant change in the value of one or more of them. You should monitor your investments and normally rebalance your portfolio about once a year to return your investments to their proper balance when they no longer conform to your investment plan. Suppose that you begin an investment program with a portfolio having an asset allocation of 30% bonds, 60% equities, and 10% cash investments. One year later, you find that some investments have performed better than others. After a year, the portfolio now consists of 40% bonds, 40% equities, and 20% cash investments. To rebalance this portfolio back to its original asset allocation, you should sell some of your and use the proceeds to purchase additional .

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