You manage a bond portfolio worth $400 million. You wish to hedge your portfolio against rise in interest rates by using T-bond futures that will mature in 9 months. The duration of your bond portfolio is 6 years, the duration of the T-bond is 7 years. The bond futures price is 98,000. (a) What action must you take and how many contracts? (b) Why do you need to use the duration of the bonds to get the answer

You manage a bond portfolio worth $400 million. You wish to hedge your portfolio against rise in interest rates by using T-bond futures that will mature in 9 months. The duration of your bond portfolio is 6 years, the duration of the T-bond is 7 years. The bond futures price is 98,000. (a) What action must you take and how many contracts? (b) Why do you need to use the duration of the bonds to get the answer

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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Similar questions

Your broker offers to sell you a CleenWtr Bond for $1150. The bond has a coupon rate of 3%, semiannual interest payments, and a maturity of 9 years. If the interest rate on comparable debt is 2.0% is your broker fairly pricing the bond? (What is the curent price of the bond)
You have two bonds in your portfolio, Bond Y and Bond Z. Bond Y matures in 10 years and Bond Z matures in 5 years. They both have the same coupon rates. If interest rates increase or decrease which bond would you expect to have the largest change in their market price?
Suppose an investor owns a 30-year Apple bond that is non callable. The coupon is 4% and the price is 125. There is a similar Apple bond (30 year maturity and 4% coupon) that is callable in 5 years. That bond is priced at 105. What does that say about the value of the call. There is also a similar Apple bond that is puttable in 5 years. Describe a rough range for this bond price, with your rationale.
Suppose that you have invested in a Treasury bond with a term-to-maturity of 8 years. What will happen to the duration of your bond if interest rates increase by 2 percentage points? Group of answer choices The duration will increase The duration will decrease The duration won't change Not enough information
PICK ONE: Explain why YOU: Suppose that 6 months after you purchase the bond, the market rate for interest on this type of bond falls to 7.00%. This will cause the (coupon / market price / par value) to (fall / rise). From the issuer’s perspective, the lower interest rate means that he or she would be (worse / better) off issuing new bonds at this lower rate than continuing to pay you 9%.
Suppose that a 1-year zero-coupon bond with face value $100 currently sells at $90.44, while a 2-year zero sells at $82.64. You are considering the purchase of a 2-year-maturity bond making annual coupon payments. The face value of the bond is $100, and the coupon rate is 12% per year. Required: a. What is the yield to maturity of the 2-year zero? b. What is the yield to maturity of the 2-year coupon bond? c. What is the forward rate for the second year? d. If the expectations hypothesis is accepted, what are (1) the expected price of the coupon bond at the end of the first year and (2) the expected holding-period return on the coupon bond over the first year? e. Will the expected rate of return be higher or lower if you accept the liquidity preference hypothesis? Complete this question by entering your answers in the tabs below. Required A Required B Required C Required D Required E Will the expected rate of return be higher or lower if you accept the liquidity preference hypothesis?…
You believe that stocks are overvalued so you elect to add bonds to your retirement plan to reduce future potential downside price risk. With cash you've received from the sale of equities, you target two bonds for purchase. What is the fair market value for each of these bonds if the YTM for both is 6.75%? First bond: What is the price of an 8-year 4.95% coupon bond with $1,000 face value paying coupons semiannually? $944.28 $908.15 $890.12 $1,117.72 $875.36
Suppose you purchased a 20-year U.S. treasury bond with a 6% annual coupon ten years ago at par, but coupon payments are made semi-annually. Today the bond's yield to maturity has risen to 8% a. If you hold the bond until maturity, what is the yield that you will earn on your investment? b. If you sell the bond now, what will be the price at which you sell the bond? c. If you sell the bond now, what annual return (yield) that you have made on this bond?
An insurance company is thinking about purchasing bonds A and B with zero coupons to cover some of its future liabilities. The redemption periods for these zero-coupon bonds are seven and twenty years, respectively.£11 million is due in 11 years, and £14 million is due in 16 years, according to the list of its liabilities.Determine bond B's value at an effective 5% annual interest rate so that Redington's theory of immunization's first two requirements are met. (correct answer=6.419) (using formulas, no tables)
Suppose that you want to construct a 2-year maturity forward loan commencing in 3 years. The face value of each bond is $1,000. Maturity (Years) 1 2 3 4 5 Price $ 996.04 895.89 833.92 772.80 675.18 Required: a. Suppose that you buy today one 3-year maturity zero-coupon bond with face value $1,000. How many 5-year maturity zeros would you have to sell to make your initial cash flow equal to zero (specifically, what must be the total face value of those 5-year zeros)? b. What are the cash flows on this strategy in each year? c. What is the effective 2-year interest rate on the effective 3-year-ahead forward loan? d. & e. Confirm that the effective 2-year forward interest rate equals (1 + f4) ×(1 + f5)-1. You therefore can interpret the 2-year loan rate as a 2-year forward rate for the last two years. Alternatively, show that the effective 2-year forward rate equals (1 + y5) 15 + (1+y3) ³. - 1
What is the price of a bond with the following information? It is 1.5 years until expiration. The coupon rate is 7 percent and coupon payments are made once per year. The market rate of return is 5.9 percent. The bond has a face value of 2000 SEK. Tips Draw a time axis so that you do not make any mistakes with the discounting. Don't look at the cash flows as an annuity, but as two separate cash flows. There is always a coupon payment when the bond matures, how long is it then until the next coupon payment? (Answers are rounded to integers) a) 265 b) 2100 c) 1971 d) 1990 e) 2216
You want to determine the value of your company bond that you have held. The market has not traded your security in a long time but still makes payments semiannually 6.2% coupon and 7 years. You find two similar bonds with characteristics as follows. Bond X: 4-year 6% coupon priced at 950 Bond Y: 6-year 5% coupon priced at 980, 1000 bond value a. What is the approximate price of your bond? b. How does your bond compare to the other two bonds?

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