Investments
Investments
11th Edition
ISBN: 9781259277177
Author: Zvi Bodie Professor, Alex Kane, Alan J. Marcus Professor
Publisher: McGraw-Hill Education
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Chapter 16, Problem 14PS
Summary Introduction

(A)

Adequate information:

The portfolio that is required to be managed is worth $1 million. The target duration stands to be 10 years. The manager has a choice of two bonds, perpetuity and 5 year maturity zero coupon bond.

To determine:

What proportion of the portfolio must be allocated towards the perpetuities and zero coupon bonds

Introduction:

Zero coupon bonds refer to the debt security that does not pay any interest payment and sold at a discount to the bondholder. It is the bond which does not make any periodic interest payment or coupon payment during its life rather it is sold at a price less than its face value. These bonds are redeemed at its face value and the difference is the profit earned by the bondholder.

Summary Introduction

(B)

To determine:

What proportion of the portfolio must be allocated towards the perpetuities and zero coupon bonds if target duration now account for 9 years

Introduction:

Zero coupon bonds refer to the debt security that does not pay any interest payment and sold at a discount to the bondholder. It is the bond which does not make any periodic interest payment or coupon payment during its life rather it is sold at a price less than its face value. These bonds are redeemed at its face value and the difference is the profit earned by the bondholder.

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Bond Valuation - A Quick Review; Author: Pat Obi;https://www.youtube.com/watch?v=xDWTPmqcWW4;License: Standard Youtube License