(a) To Discuss: You are the manager for the bond portfolio of a pension fund. The policies of the fund allow for the use of active strategies in managing the bond portfolio. It appears that the economic cycle is beginning to mature, inflation is expected to accelerate and in an effort to contain the economic expansion, the central bank is moving toward tighter monetary policy. For each of the situations below, state which one of the two bonds you would prefer. Briefly justify your answer in each case. Government of Canada (Canadian Pay),4% due in 2022,and priced at 101.25 to yield 3.5% to maturity; Or Government of Canada (Canadian Pay),4% due in 2032,and priced at 95.75 to yield 4.19 % to maturity. Introduction: A bond is a security that creates an obligation on the issuer to make specified payments to the holder for a given period of time. The face value of the bond is the amount the holder will receive on maturity along with the coupon rate which is also known as the interest rate of the bond.A zero-coupon bond is a bond where the face value is repaid at the time of maturity.Yield to maturity is defined as the discount rate that makes the present payments from the bond equal to its price, in simple terms it is the average rate of return a holder can expect from that bond.

Question

Want to see the full answer?

Answer 1

Question

Chapter 11, Problem 9CP

Summary Introduction

(a)

To Discuss:

You are the manager for the bond portfolio of a pension fund. The policies of the fund allow for the use of active strategies in managing the bond portfolio. It appears that the economic cycle is beginning to mature, inflation is expected to accelerate and in an effort to contain the economic expansion, the central bank is moving toward tighter monetary policy. For each of the situations below, state which one of the two bonds you would prefer. Briefly justify your answer in each case.

Government of Canada (Canadian Pay),4% due in 2022,and priced at 101.25 to yield 3.5% to maturity;
Or
Government of Canada (Canadian Pay),4% due in 2032,and priced at 95.75 to yield

4.19 % to maturity.

Introduction:

A bond is a security that creates an obligation on the issuer to make specified payments to the holder for a given period of time. The face value of the bond is the amount the holder will receive on maturity along with the coupon rate which is also known as the interest rate of the bond.A zero-coupon bond is a bond where the face value is repaid at the time of maturity.Yield to maturity is defined as the discount rate that makes the present payments from the bond equal to its price, in simple terms it is the average rate of return a holder can expect from that bond.

Expert Solution & Answer

Want to see the full answer?

Check out a sample textbook solution

See solution

Students have asked these similar questions

King’s Park, Trinidad is owned and operated by a private company, Windy Sports Ltd. You work as the Facilities Manager of the Park and the CEO of the company has asked you to evaluate whether Windy should embark on the expansion of the facility given there are plans by the Government to host next cricket championship. The project seeks to increase the number of seats by building four new box seating areas for VIPs and an additional 5,000 seats for the general public. Each box seating area is expected to generate $400,000 in incremental annual revenue, while each of the new seats for the general public will generate $2,500 in incremental annual revenue. The incremental expenses associated with the new boxes and seating will amount to 60 percent of the revenues. These expenses include hiring additional personnel to handle concessions, ushering, and security. The new construction will cost $15 million and will be fully depreciated (to a value of zero dollars) on a straight-line basis over…

A brief introduction and overview of the company"s (a) uk vodaphone -300word history and current position in respective marketplace.A graphical illustration, together with a short written summary, of the five year trends in sales, profits,costs and dividends paid-100word

A brief introduction and overview of the company"s (a) uk vodaphone (b) uk Hsbc bank, (c)uk coca-cola history and current position in respective marketplace.