MCB has just issued a guaranteed investment contract (GIC). MCB needs to immunize this GIC, which guarantees a single payment of USD160,000,000 in 4 years and provides a bond equivalent yield of approximately 3.50%. The investment team calculated the present value of the GIC to be USD 145,700,000. This is the amount they intend to invest today to immunize the GIC. WB is not permitted to use leverage and the current duration is 4. MCB is building a suitable portfolio and already holds the U.S. government bonds shown in Exhibit 1. Bond Bond A Bond B Bond X Bond Y Bond Z Market Price (USD) 102.32 94.9 Bond Existing Portfolio Bonds Total Market Value (USD) 49,113,600 59,630,000 MCB must choose a U.S. government bond to complete the immunized portfolio. The investment team has gathered the data shown in Exhibit 2. Bonds Available to Complete Immunized Portfolio Market Price (USD) Yield to Maturity 99.97 3.52% 99.36 3.89% 99.35 3.85% Total Dollar Duration 954,278 4,209,878 Modified Duration 1.333 2.154 1.810 Determine which bond (X, Y, or Z) is the most suitable for MCB to complete the immunized portfolio. Justify your response with one reason. Show your calculations. What are the risks associated with holding a portfolio of bonds?
MCB has just issued a guaranteed investment contract (GIC). MCB needs to immunize this GIC, which guarantees a single payment of USD160,000,000 in 4 years and provides a bond equivalent yield of approximately 3.50%. The investment team calculated the present value of the GIC to be USD 145,700,000. This is the amount they intend to invest today to immunize the GIC. WB is not permitted to use leverage and the current duration is 4. MCB is building a suitable portfolio and already holds the U.S. government bonds shown in Exhibit 1. Bond Bond A Bond B Bond X Bond Y Bond Z Market Price (USD) 102.32 94.9 Bond Existing Portfolio Bonds Total Market Value (USD) 49,113,600 59,630,000 MCB must choose a U.S. government bond to complete the immunized portfolio. The investment team has gathered the data shown in Exhibit 2. Bonds Available to Complete Immunized Portfolio Market Price (USD) Yield to Maturity 99.97 3.52% 99.36 3.89% 99.35 3.85% Total Dollar Duration 954,278 4,209,878 Modified Duration 1.333 2.154 1.810 Determine which bond (X, Y, or Z) is the most suitable for MCB to complete the immunized portfolio. Justify your response with one reason. Show your calculations. What are the risks associated with holding a portfolio of bonds?
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
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Transcribed Image Text:MCB has just issued a guaranteed investment contract (GIC). MCB needs to immunize
this GIC, which guarantees a single payment of USD160,000,000 in 4 years and provides
a bond equivalent yield of approximately 3.50%. The investment team calculated the
present value of the GIC to be USD 145,700,000. This is the amount they intend to invest
today to immunize the GIC. WB is not permitted to use leverage and the current duration
is 4.
MCB is building a suitable portfolio and already holds the U.S. government bonds shown
in Exhibit 1.
Existing Portfolio Bonds
Bond
Market Price (USD)
Total Market Value (USD)
Total Dollar Duration
Bond A
102.32
49,113,600
954,278
Bond B
94.9
59,630,000
4,209,878
MCB must choose a U.S. government bond to complete the immunized portfolio. The
investment team has gathered the data shown in Exhibit 2.
Bonds Available to Complete Immunized Portfolio
Yield to Maturity
3.52%
Modified Duration
Market Price (USD)
99.97
Bond
Bond X
1.333
Bond Y
99.36
3.89%
2.154
Bond Z
99.35
3.85%
1.810
Determine which bond (X, Y, or Z) is the most suitable for MCB to complete the
immunized portfolio. Justify your response with one reason. Show your calculations.
What are the risks associated with holding a portfolio of bonds?
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