A hedge fund specializes in investments in emerging market sovereign debt. The fund manager believes that the implied default probabilities are too high, which means that bonds are viewed as "cheap" and the credit spreads are too high. The hedge fund plans to take a position on one of these available bonds. Bond A B C Time-to- Maturity 10 years 20 years 30 years Coupon Rate 10% 10% 10% Price 58.075279 51.304203 50.210636 Yield-to- Maturity 20% 20% 20% The coupon payments are annual. The yields-to-maturity are effective annual rates. The prices are per 100 of par value. A. Compute the approximate modified duration of each of the three bonds using a 1 bp change in the yield-to-maturity and keeping precision to six decimals (because approximate duration statistics are very sensitive to rounding). B. Which of the three bonds is expected to have the highest percentage price increase if the yield-to-maturity on each decrease by the same amount - for instance, by 10 bps from 20% to 19.90%?

A hedge fund specializes in investments in emerging market sovereign debt. The fund manager believes that the implied default probabilities are too high, which means that bonds are viewed as "cheap" and the credit spreads are too high. The hedge fund plans to take a position on one of these available bonds. Bond A B C Time-to- Maturity 10 years 20 years 30 years Coupon Rate 10% 10% 10% Price 58.075279 51.304203 50.210636 Yield-to- Maturity 20% 20% 20% The coupon payments are annual. The yields-to-maturity are effective annual rates. The prices are per 100 of par value. A. Compute the approximate modified duration of each of the three bonds using a 1 bp change in the yield-to-maturity and keeping precision to six decimals (because approximate duration statistics are very sensitive to rounding). B. Which of the three bonds is expected to have the highest percentage price increase if the yield-to-maturity on each decrease by the same amount - for instance, by 10 bps from 20% to 19.90%?

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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Assignement B Abacus Ltd is an investment fund that specializes in fixed income securities. At the end of2010 the fund’s bond portfolio has the following information BOND YIELD TO MATURITY PRICE DURATION CONVEXITY A 12% 1045 2.35 16.46 B 14% 2265 4.26 22.80 C 8% 1430 3.45 11.96 D 10% 1100 4.20 15.56 Assume that the yield to maturity on each bond increases by 4%, calculate(i) The percentage by which the price of each bond will decrease(ii) The amount in cedis by which the price of each bond will decrease (iii) The percentage and the cedi decrease in the total value of the portfolio.
Please put the figures in the workings instead of leeters, for example the solutions to this question below: Abacus Ltd is an investment fund that specializes in fixed-income securities. At the end of 2010, the fund’s bond portfolio has the following information Bonds Yield to maturity Price Duration Convexity A 12% 1045 2.35 16.46 B 14% 2265 4.26 22.80 C 8% 1430 3.45 11.96 D 10% 1100 4.20 15.56 Assume that the yield to maturity on each bond increases by 4%, calculate(i) The percentage by which the price of each bond will decrease.(ii) The amount in cedis by which the price of each bond will decrease.(iii) The percentage and the cedi decrease in the total value of the portfolio. Please the answers to this question, I need the full solution.
NBP Sarmaya Izafa Fund is attempting to balance one of the bond portfolios under its management. The fund has identified three bonds which have five-year maturities and which trade at a YTM of 9 percent. The bonds differ only in that the coupons are 7 percent, 9 percent, and 11 percent. a. What does the concept of duration mean in context of security valuation? b. On what factors duration of a bond depends and what relation duration has with those factors? c. Calculate the duration of the tree bonds as described in para above. d. Plot the relation between duration and coupon rate
Which of the following statements is the most accurate? 43. a. Long-term cash flows are riskier than short-term cash flows.Furthermore, a 20-year bond that is callable after 5 years would have a shorter projected duration, if not none at all, than a noncallable 20-year bond with equal maturity. As a result, if all other features are equal, investors can demand a lower rate of return on the callable bond than on the noncallable bond. b. A noncallable 20-year bond would have an average life that is equivalent to or better than a callable 20-year bond with otherwise similar characteristics. Furthermore, the longer a bond's lifespan, the higher the interest rate danger it poses to buyers. As a result, while all other factors remain stable, callable bonds subject borrowers to fewer interest rate risk than noncallable bonds. c. Both a and b are right statements. d. None of the above claims are true.
Assume newly issued 30-year-on-the-run bonds sell at lower yields (higher prices) than 29 ½ year bonds with a nearly identical duration. A hedge fund that buys 29 ½ year bonds and sells 30 year bonds is taking a ______. Group of answer choices market neutral position conservative position bullish position bearish position none of the above
47. One of the points below is the most accurate?a. A 10-year 10% coupon bond has a lower chance of reinvestment than a 10-year 5% coupon bond (assuming all else equal).b. The net return on a bond over a specified year is comprised by both the year's coupon interest payments and the shift in the bond's valuation from the start of the end of the year.c. The price of a 20-year 10% bond is less susceptible to interest rate fluctuations (and hence has less interest rate risk) than the price of a 5-year 10% bond.d. A $1,000 bond with $100 nominal interest payments and a five-year term (not likely to default) will sell for a discount if interest rates were below 9% and for a profit if interest rates were above 11%.e. All of the statements a, b, and c are true.
A corporate bond has a nominal or observed yield of 9.8%. Your sister, the famouseconomist, has given you the following estimates:Inflation-risk premium = 3.00%Default-risk premium = 2.10%Maturity premium = 1.90%Liquidity premium = 0.50%On the basis of these data, what is the best estimate of the real risk-free rate of return?
Suppose a 10-year Treasury (risk-free) bond has a YTM of 5% and a Coupon Rate of 5%. Further, a 10-year corporate bond has a YTM of 7% and a coupon rate of 6%. What is the expected risk premium (in dollars) of this bond? a)$44.26 b)$106.18 c)$8.08 d)$71.06
7 Suppose the interest rates in the market for one-year, zero-coupon Treasury strips and for one-year, zero-coupon grade B corporate bonds are, respectively: i = 2.05% k = 7.80% Compute the probabilities of repayment and default as well as the risk premium.
If the estimated return on a corporate bond is 8%, while the return on US Treasury bond is 3%. How much is the risk premium in this case? Hint: The risk premium is the compensation investors required to hold the risky asset. It equals the expected return on the risky investment minus the risk-free return.
Abacus Ltd is an investment fund that specializes in fixed-income securities. At the end of 2010, the fund’s bond portfolio has the following information Bonds Yield to maturity Price Duration Convexity A 12% 1045 2.35 16.46 B 14% 2265 4.26 22.80 C 8% 1430 3.45 11.96 D 10% 1100 4.20 15.56 Assume that the yield to maturity on each bond increases by 4%, calculate(i) The percentage by which the price of each bond will decrease.(ii) The amount in cedis by which the price of each bond will decrease.(iii) The percentage and the cedi decrease in the total value of the portfolio.
An investor in Treasury securities expects inflation to be 2.1%in Year 1, 2.7% in Year 2, and 3.65% each year thereafter. Assume that the real risk-free rateis 1.95% and that this rate will remain constant. Three-year Treasury securities yield 5.20%,while 5-year Treasury securities yield 6.00%. What is the difference in the maturity riskpremiums (MRPs) on the two securities; that is, what is MRP5 - MRP3?

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