A hedge fund specializes in investments in emerging market sovereign debt. The fund manager believes that the implied default probabilities are too high, which means that bonds are viewed as "cheap" and the credit spreads are too high. The hedge fund plans to take a position on one of these available bonds. Bond A B C Time-to- Maturity 10 years 20 years 30 years Coupon Rate 10% 10% 10% Price 58.075279 51.304203 50.210636 Yield-to- Maturity 20% 20% 20% The coupon payments are annual. The yields-to-maturity are effective annual rates. The prices are per 100 of par value. A. Compute the approximate modified duration of each of the three bonds using a 1 bp change in the yield-to-maturity and keeping precision to six decimals (because approximate duration statistics are very sensitive to rounding). B. Which of the three bonds is expected to have the highest percentage price increase if the yield-to-maturity on each decrease by the same amount - for instance, by 10 bps from 20% to 19.90%?

A hedge fund specializes in investments in emerging market sovereign debt. The fund manager believes that the implied default probabilities are too high, which means that bonds are viewed as "cheap" and the credit spreads are too high. The hedge fund plans to take a position on one of these available bonds. Bond A B C Time-to- Maturity 10 years 20 years 30 years Coupon Rate 10% 10% 10% Price 58.075279 51.304203 50.210636 Yield-to- Maturity 20% 20% 20% The coupon payments are annual. The yields-to-maturity are effective annual rates. The prices are per 100 of par value. A. Compute the approximate modified duration of each of the three bonds using a 1 bp change in the yield-to-maturity and keeping precision to six decimals (because approximate duration statistics are very sensitive to rounding). B. Which of the three bonds is expected to have the highest percentage price increase if the yield-to-maturity on each decrease by the same amount - for instance, by 10 bps from 20% to 19.90%?

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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1) a. You approach your broker to borrow money against securities held in your portfolio. Eventhough the loan will be secured by the securities in your portfolio, the broker's rate for lending tocustomers is 5 percent. Assuming a risk-free rate of 4 percent and an expected market return of 11percent with a standard deviation of 15 percent, draw the capital market line related to yourinvestment opportunities. b. Estimate your expected return and risk if you invest 20 percent of your portfolio in the risk-freeasset. What if you decide to borrow 20 percent of your initial wealth and invest the money in themarket?
Now suppose there is no financial intermediary to handle liquidity shocks. However, at t = 1 a market for bonds opens up and agents can trade their wealth at t = 1 for wealth at t = 2. Each bond pays 1 at t = 2 and its price is pM. Calculate the consumer's optimal investment decision IM at t = 0, the price of the bond pM, and the optimal consumption in the two states cM, cM. Compare the mutual fund and bond market allocations: are c4 and c bigger or smaller than cf and c, respectively?
Which of the following statement is wrong? Group of answer choices a)the coupon rate of a newly issued bond is generally set equal to the required rate on bonds of equal risk. b)Since short-term interest is more volatile than the long-term interest rate, the price risk of short-term bond is more than that of the long-term bond c)The required rate of return for AAA bond is lower than that of an AA bond d)Sinking funds are provisions included in bond indentures that require companies to retire bonds on a scheduled basis prior to their final maturity.
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Which statement is false? O A. As the term of a bond approaches zero, the price approaches kar. O B. For corporate and government bonds, the coupon payments amortize the princi OC. Overall, bond prices are less volatile than stock prices. O D. The coupon on a bond is expressed as a percentage of face value. O E. Corporate bonds can be bought and sold in the secondary market. Reset Selection
When the present value of the cash flows on a large bond portfolio changes because one the issuers does not make the coupon payment, what type of risk is this? Group of answer choices A.Spread risk B.Market risk C.Recovery risk D.Default risk. Need typed answer only.Please give answer within 45 minutes
Martin Brown is a fixed-income portfolio manager who works with large institutional clients. Brown is meeting with Sarah Redi, a consultant to the Horizon Redi Pension Plan, to discuss the management of the fund's, approximately R100 million. Treasury bond portfolio. The current Treasury yield curve is given in the following table. Maturity (years) 1 12 3 4 YTM (%) 6.0 8.0 9.0 9.5 Assume that the liquidity premiums for the one-year, two-year and three-year maturities (one year from now) are 1% 2.33% and 4%, respectively, determine the expected spot rates in one years time for the one, two, and three year maturing bonds.
You can assume that an Exchange-Traded Fund uses a value-weighted momentum strategy of buying winners and short-selling losers, and limits the universe to large & mid-cap stocks in order to reduce transactions costs. The fund does not use any other tools to mitigate transaction costs. In this case, what is the optimal rebalancing frequency for the momentum strategy? O A. Daily O B. Weekly OC. Monthly O D. Quarterly O E. Semi-annually OF. Annually O G. Momentum is a long-term strategy that does not need to be rebalanced every year.
1. You are trying to plan your investments for the next year. You have decided that the market will either be strong (a bull market), weak (a bear market) or normal. You think that stocks, bonds, and bills will earn the following returns in these scenarios: Scenario Bull market Normal market Bear market Probability 0.20 0.55 0.25 Stock Return 0.25 0.10 -0.15 Bond Return 0.06 0.03 0.02 Bill Return 0.03 0.03 0.03 You have also decided that you have a risk-aversion (A) of 8. (a) What is the expected return for each of the securities? (b) What is the volatility of each security return? What is the covariance between stock and bond returns? (d) If you combine stocks and bills as an investment, what is your op- timal combination? What is your expected return? What is your portfolio's volatility? (e) If you combine bonds and bills, what is your optimal combination? What is your expected return? What is your portfolio's volatility? (f) If you combine stocks and bonds, what is your optimal…
Bond traders, currently in possession of the bonds, are hoping for the Group of answer choices yield to remain steady. coupon rate to rise. yield to rise. yield to fall. coupon rate to fall.
FIGURE 6.14 One-fund theorem. When both borrowing and lending at the risk-free rate are allowed, there is a unique fund F of risky assets that is efficient. All points on the efficient frontier are combinations of F and the risk-free asset. The information concerning the 1-year covariances and mean values of the rates of return on five risky securities (assets) is shown in the table below. Security Covariance V 2.30 93 .62 74 15.1 -23 26 -27 -56 2 56 12.5 93 62 1.40 22 22 56 1.80 .78 -27 78 3.40 -56 14.7 9.02 17.68 4 74 - 23 26 2.60 The mean values in the column labeled F are expressed on a percentage basis, whereas the covariances are expressed in units of (percent)? / 100. For example, the first security has an expected rate of return of 15.1%, or 0.151, and a variance of return of 0.023. And the covariance between security 1 and security 2 is 0.0093, while the covariance between security 1 and security 3 is 0.0062. Assume there is also a risk-free asset with r; = 10%. The one-fund…
Which of these statements about bond markets is TRUE? * Bond markets include both equity and debt instruments having longer maturities than one year. Bonds are always safer to invest in than stocks. The bond is selling at a discount if current market rates are higher than the coupon rate. All of these are correct. None of these is correct.

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