BULLET IMMUNIZATION. FOR THIS AND THE NEXT TWO QUESTIONS. A portfolio manager wishes to invest $9,734 in bonds and desires to earn 4.2% over the next 4.5 years. The FV of this investment, which is $11,714, will be used to meet a payment obligation at that time. To immunize the investment, the manager can invest in a $10,000 face value bond currently selling for $9,734 with a coupon rate of 3.6% and 5 years to maturity. This bond's duration is 4.5 years. Assume the reinvestment rate will remain at 4.2% but only until end of Year 3, afterwards it is expected to fall to 4% in years 4 and 5. Calculate total interest received over the next 4.5 years. Hint. Please design a simple spreadsheet such as the one shown in the video on Bullet Immunization. Be aware that the last investment period is only half a year. Therefore use one half of YTM in Year 4.5 for compounding. The following table is a guide: Reinvestment rate: Coupon pmt received 1) $1,742 2) $9,980 4) $11,714 5) None of the above YEAR 3 4 4.5
BULLET IMMUNIZATION. FOR THIS AND THE NEXT TWO QUESTIONS. A portfolio manager wishes to invest $9,734 in bonds and desires to earn 4.2% over the next 4.5 years. The FV of this investment, which is $11,714, will be used to meet a payment obligation at that time. To immunize the investment, the manager can invest in a $10,000 face value bond currently selling for $9,734 with a coupon rate of 3.6% and 5 years to maturity. This bond's duration is 4.5 years. Assume the reinvestment rate will remain at 4.2% but only until end of Year 3, afterwards it is expected to fall to 4% in years 4 and 5. Calculate total interest received over the next 4.5 years. Hint. Please design a simple spreadsheet such as the one shown in the video on Bullet Immunization. Be aware that the last investment period is only half a year. Therefore use one half of YTM in Year 4.5 for compounding. The following table is a guide: Reinvestment rate: Coupon pmt received 1) $1,742 2) $9,980 4) $11,714 5) None of the above YEAR 3 4 4.5
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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12.
Transcribed Image Text:Question 16
BULLET IMMUNIZATION. FOR THIS AND THE NEXT TWO QUESTIONS. A portfolio manager wishes to invest $9,734 in bonds and
desires to earn 4.2% over the next 4.5 years. The FV of this investment, which is $11,714, will be used to meet a payment obligation at
that time. To immunize the investment, the manager can invest in a $10,000 face value bond currently selling for $9,734 with a coupon
rate of 3.6% and 5 years to maturity. This bond's duration is 4.5 years. Assume the reinvestment rate will remain at 4.2% but only until
end of Year 3, afterwards it is expected to fall to 4% in years 4 and 5. Calculate total interest received over the next 4.5 years. Hint.
Please design a simple spreadsheet such as the one shown in the video on Bullet Immunization. Be aware that the last investment
period is only half a year. Therefore use one half of YTM in Year 4.5 for compounding. The following table is a guide:
YEAR
3
4
4.5
Reinvestment rate:
Coupon pmt received
1) $1,742
2) $9,980
4) $11,714
5) None of the above
Transcribed Image Text:Question 18
If the portfolio manager invests in this bond, will the bullet immunization strategy be successful?
1) Yes, total portfolio value in Year 4.5 is approximately $10,000
2) Yes, total portfolio value in Year 4.5 is approximately $9,980
3) Yes, total portfolio value in Year 4.5 is approximately $11,722
TS A des ane
5) None of the above
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