c. The investments officer for Sillistine Savings is concerned about interest rate risk lowering the value of the institution's bonds. A check of the bond portfolio reveals an average duration of 4.5 years. How could this bond portfolio be altered in order to minimize interest rate risk within the next year?

c. The investments officer for Sillistine Savings is concerned about interest rate risk lowering the value of the institution's bonds. A check of the bond portfolio reveals an average duration of 4.5 years. How could this bond portfolio be altered in order to minimize interest rate risk within the next year?

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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Which of the comments below is the most accurate?a. Long-term bonds have a higher interest rate price danger than short-term bonds, but they have a lower reinvestment rate risk.b. Bonds with higher coupons have higher interest rate price danger, but lower reinvestment rate risk.c. If interest rates stay unchanged for the next five years, the price of a discount bond would still remain unchanged.d. Both b and c are valid statements.e. All of the above claims are true.
How can the behavior of market interest rates and bond returns over the past 50 years be described? Do swings in market interest rates have any bearing on bond returns?
Suppose you are considering two possible investment opportunities: a 12-year Treasury bond and a 7-year, A-rated corporate bond. The current real risk-free rate is 3%, and inflation is expected to be 2% for the next 2 years, 3% for the following 4 years, and 4% thereafter. The maturity risk premium is estimated by this formula: MRP = 0.02(t - 1)%. The liquidity premium (LP) for the corporate bond is estimated to be 0.3%. You may determine the default risk premium (DRP), given the company's bond rating, from the following table. Remember to subtract the bond's LP from the corporate spread given in the table to arrive at the bond's DRP. Corporate Bond Yield Rate Spread = DRP + LP U.S. Treasury 0.83 % — AAA corporate 1.03 0.20 % AA corporate 1.39 0.56 A corporate 1.79 0.96 What yield would you predict for each of these two investments? Round your answers to three decimal places. 12-year Treasury yield: fill in the blank _ % 7-year Corporate yield: fill…
1. If the term structure is upward sloping and the risk premium is negative, we know with certainty which of the following? i) Investors expect interest rates to rise ii) The two year rate is above the one year rate iii) The forward rate will be above the spot or current rate iv) The expected return from a two year bond is above the expected return from rolling over in two one-year bonds a) I and II only b) I, II, and III only c) II and III only d) I, III, and IV only
Does buying and selling of debt instruments maturing in one year or less, a characteristic of money market?
The following information was gathered by a security analyst. The real rate of interest is 4% and is expected to remain constant for the next 5 years, Inflation is expected to be 2% next year, 3.5% the following year, 5% the third to fifth year. The maturity risk premium is expected to be 0.3 x (t-1)%, The liquidity premium on relevant 5-year securities is 0.75% and the default risk premium on relevant 5-year securities is 0.6%. What is the yield in percent on a 5-year corporate bond? A 10-year Treasury bond yields 6.4%, and a 10-year corporate bond yields 8.4%. The market expects that inflation will average 2.5% over the next 10 years. Assume that maturity risk premium is equal to 0.3(T-1)%, and that the annual real risk-free rate will remain constant over the next 10 years. What is the liquidity risk premium of the 10-year treasury bond? A 10-year Treasury bond yields 6.4%, and a 10-year corporate bond yields 8.4%. The market expects that inflation will average 2.5% over the next 10…
There is a risk of loss associated with selling bonds before the maturity date. A funds manager is holding 10-year bonds with a current value equal to the face value of $100,000. The bonds pay a fixed annual coupon of 8 per cent per annum. Interest rates for similar types of bonds increase to 9 per cent per annum. Calculate the new value of the bonds.
Bond prices change whenever the market interest rate changes. In general, short-term interest rates are more volatile than long-term interest rates. Therefore, short-term bond prices are more sensitive to interest rate changes than are long-term bond prices. Is this statement true or false. Explain your answer by making up a "reasonable" example based on a 1-year and a 20-year bond to help answer the question.
Use the following data on bond yield: Yield on top-rated corporate bonds Yield on intermediate-grade corporate bonds Required: a. Calculate the change in the confidence index from last year to this year. b. Is the confidence index rising or falling? Required A Required B Complete this question by entering your answers in the tabs below. This Year 4.3% 6.3 This year Last year Calculate the change in the confidence index from last year to this year. Note: Round your answers to 3 decimal places. Confidence Index X Answer is not complete. (0.400) X Last Year 8.6% 10.2
Which of the following are short-term financial instruments? Select one: a. A banker's acceptance.b. A bond with five years maturity c.Share of Raysut cement d.None of these
Mr. Aiman, Treasurer of AJ Finance Berhad, has just completed a Maturity Bucket Analysis based on the a 6-month horizon. a) If the market expectation is increase in interest rates, find the maturity bucket should Mr. Aiman, worries most about. Explain why the particular bucket matters. b) Outline an appropriate hedge strategy for Mr. Aiman,.
financial risk management Assume you have the following asset and liability in your Balance Sheet:Asset - Bond AModified Duration = 2.6 yearsValue= RM1.5 millionLiability - Bond BModified Duration = 3.1 yearsValue= RM1.0 million a. Calculate the duration gap.

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