A pension fund manager is holding a 10-year 10% coupon bond in the portfolio and the interest rate is 10%. What loss would the fund be exposed to if the interest rate rises to 11% tomorrow? However, this manager can have the option to switch to a 10-year 20% coupon bond. Would he switch to this bond in terms of the interest - rate risk?

A pension fund manager is holding a 10-year 10% coupon bond in the portfolio and the interest rate is 10%. What loss would the fund be exposed to if the interest rate rises to 11% tomorrow? However, this manager can have the option to switch to a 10-year 20% coupon bond. Would he switch to this bond in terms of the interest - rate risk?

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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You manage a pension fund that will provide retired workers with lifetime annuities. You expect a large number of workers to retire in 8 years. You have the following two bonds to invest in and immunize this portfolio. Inputs Bond A Bond B Settlement date 01-01-2020 01-01-2020 Maturity date 01-01-2025 01-01-2040 Coupon rate 0.025 0.0000 Face Value $1,000.00 $1,000.00 Coupons per year 1 1 Obligation Time to Payout 8 Payout $50,000,000 Initial Yield to Maturity 0.0750 Required: Using any necessary data above, calculate the Present value and Macaulay Duration of the obligation. Assume annual payments. Then calculate the Macaulay Duration and the Modified Duration for each bond. Use this information to immunize the portfolio. Then, re-immunize the portfolio 1 year later using the new yield.
Use the following information to answer the question(s) below. Suppose that a default-risk-free zero-coupon bond with a face value of $100 and 5 years to maturity is currently trading at $60. Another bond with the same face value and time to maturity but at risk of defaulting sells for $30. (If this risky bond defaults, there is a 70% chance that 30% of the face value will be recovered and a 30% chance that 50% of the face value will be recovered.) Also, suppose the spread between the expected zero rates of the two bonds is 5% pa. What must be the default probability of the second bond (risky bond)? Choose the closest answer. O 47.66% 58.82% 37.32% None of the other answers are correct. O 67.23%
You believe that stocks are overvalued so you elect to add bonds to your retirement plan to reduce future potential downside price risk. With cash you've received from the sale of equities, you target two bonds for purchase. What is the fair market value for each of these bonds if the YTM for both is 6.75%? First bond: What is the price of an 8-year 4.95% coupon bond with $1,000 face value paying coupons semiannually? $944.28 $908.15 $890.12 $1,117.72 $875.36
A zero-coupon bond with a market-beta of 0.2 promises to pay $1,000 in the first year. However, it may default and pay nothing with probability 0.09. If the risk-free rate is 4%, the equity premium is 6.1%, and the CAPM is correct, what would be the bond price today?
You are a risk analyst in a public pension fund. You have been asked to calculate the appropriate amount of futures to hedge the bond below. What is your calculation?
You have been provided with the following options. a. A 10-year, R1000 face value, 10 percent coupon bond with semiannual interest payments. b. A 10-year, R1000 face value, 10 percent coupon bond with annual interest payments. C.A 10-year, R1000 face value, zero coupon bond. d. A 10-year R100 annuity. ) Determine which one poses the highest price risk
Which of the following statements is the most accurate? 43. a. Long-term cash flows are riskier than short-term cash flows.Furthermore, a 20-year bond that is callable after 5 years would have a shorter projected duration, if not none at all, than a noncallable 20-year bond with equal maturity. As a result, if all other features are equal, investors can demand a lower rate of return on the callable bond than on the noncallable bond. b. A noncallable 20-year bond would have an average life that is equivalent to or better than a callable 20-year bond with otherwise similar characteristics. Furthermore, the longer a bond's lifespan, the higher the interest rate danger it poses to buyers. As a result, while all other factors remain stable, callable bonds subject borrowers to fewer interest rate risk than noncallable bonds. c. Both a and b are right statements. d. None of the above claims are true.
Now suppose a financial institution has a duration gap of -4 years and $5 million in assets. The cheapest to deliver bond for Treasury futures contracts has a duration of 3 years. How will the manager hedge this interest rate risk? Assume the cheapest to deliver bond is trading at par.
A portfolio for a pension fund that you manage has payments resembling a perpetuity. You want to immunize the pension fund liability by purchasing 2 bonds: a zero coupon bond maturing in 6 years & a 10% coupon bond with a duration of 25 years. Assume the yield on both bonds & the pension fund is 7%. What percent of your portfolio should you invest in the zero-coupon bonds?

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