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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ABC Co. has a large amount of variable rate financing due in one year. The management is concerned about the possibility of increases in short-term rates. Which would be an effective way of hedging this risk?a. Buy Treasury notes in the futures market.b. Sell Treasury notes in the futures market.c. Buy an option to purchase Treasury bonds.d. Sell an option to purchase Treasury bonds
Quantitative Problem: An analyst evaluating securities has obtained the following information. The real rate of interest is 2.5% and is expected to remain constant for the next 5 years. Inflation is expected to be 2% next year, 3% the following year, 4% the third year, and 5% every year thereafter. The maturity risk premium is estimated to be 0.1 x (t- 1)%, where t = number of years to maturity. The liquidity premium on relevant 5-year securities is 0.5% and the default risk premium on relevant 5-year securities is 1%. a. What is the yield on a 1-year T-bill? Do not round intermediate calculations. Round your answer to two decimal places. % b. What is the yield on a 5-year T-bond? Do not round intermediate calculations. Round your answer to two decimal places. % c. What is the yield on a 5-year corporate bond? Do not round intermediate calculations. Round your answer to two decimal places. % Icon Key Check My Work (3 remaining)
Suppose a company is choosing between bank loans and bonds. The interest rate in the bank loan is 3.5%, and an investment bank predicted that the company will pay close to 4% to issue a bond with the same maturity. In addition, fees are estimated to be higher for the bond issuance than for the bank loan. Explain why this company may still decide to issue the bond rather than borrowing through a bank.
A manager of a commercial bank’s security portfolio is analyzing three bonds and is using duration as the measure of interest rate risk. The three bonds all trade at a yield to maturity of 10 percent and have $10,000 par values. The bonds differ only in the amount of annual coupon interest that they pay: 8, 10, or 12 percent. What is the duration for each five-year bond? What is the relationship between duration and the amount of coupon interest that is paid?
D4) Finance An investor has two choices: a) Investing in a five-year bond and hold it for five years b) Investing in a two-year bond and reinvesting in a three year bond when it matures If the investor opts for choice a), he/she eliminates the following risk/s: Group of answer choices °price risk and currency risk °reinvestment risk and currency risk °interest rate risk and currency risk °reinvestment risk °None of the answers are correct
1) What are the factors affecting the discount rate used in project valuation? 2) A bond was issued with interest payment every 3 months. The coupon rate of the bond is 12%. The yield to maturity of the bond is 16%. The nominal value of the bond is 1000 TL. The maturity of the bond is 5 years. What is the market price of this bond? Is this bond a discounted or premium bond?
Give typing answer with explanation and conclusion Consider the prevailing condition of inflation (including changes in global oil price), the economy, budget deficit, decreases in expected remittance inflow, and the central bank monetary policy that could affect interest rate. Based on the prevailing conditions do you think bond price will increase or decreases in next six-month period. In the real economic environment which other factors may affect the bond price? Which factor in your opinion will have biggest impact on bond price? Assess the above given situations.
Consider two types of bonds: A 10 year to maturity corporate bond and a 10 year to maturity Treasury bond. We know that Corporate Bonds have default risk. Discuss the impact on the markets for these two type of bonds & on the risk premium when there is a FALL in the risk of corporate default? Provide a DISCUSSION of the impact and ILLUSTRATE the impact graphically using two diagrams, one for corporate bonds and one for Treasuries. The diagrams should show the impact on each yield and the impact on the risk premium [label your diagram clearly to illustrate the old premium vs. the new premium]. hint: draw your diagrams side by side, so you can show the risk premiums as done in lecture.
Solve these 2 practice problems
Assume you have the following asset and liability in your Balance Sheet: Asset - Bond A Modified Duration = 2.6 years Value = RM1.5 million Liability - Bond B Modified Duration = 3.1 years Value = RM1.0 million a. Calculate the duration gap. b. What is the expected change in Net Worth if interest increases by 1%? Assume previous interest is 10% c. What should or could you to achieve immunised balance sheet? Note: Please show all workings.
Suppose you are a bond dealer looking for arbitrage opportunities. The first column in the table below shows the current prices of the four government bonds (without default risk). Assume that you can buy and short these bonds at a given price. The remaining columns of the table are the cash flows generated by the bonds at the end of the first, second and third years. All bonds mature at the end of the third year. Are there arbitrage opportunities for the prices of these four types of bonds? If it exists, how can you seize this opportunity?
As bonds approach their maturity dates, www A. prices will approach their par values. OB. the risk of a call will increase. OC. premiums or discounts will increase. O D. the bonds' prices will become more sensitive to changes in interest rates.

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