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?
Chapter7: International Arbitrage And Interest Rate Parity
Section: Chapter Questions
Problem 3SBD
Related questions
Concept explainers
Question
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 8 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
Essentials of Business Analytics (MindTap Course …
Statistics
ISBN:
9781305627734
Author:
Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson
Publisher:
Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
Essentials of Business Analytics (MindTap Course …
Statistics
ISBN:
9781305627734
Author:
Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson
Publisher:
Cengage Learning