You are managing a portfolio of £20 million. Your target duration is 6 years, and you can choose from two bonds: a zero-coupon bond with 3 years of maturity and a perpetuity, each currently yielding 5%. Next year, the target duration is 5 years. What is the portfolio weight invested in the perpetuity?

You are managing a portfolio of £20 million. Your target duration is 6 years, and you can choose from two bonds: a zero-coupon bond with 3 years of maturity and a perpetuity, each currently yielding 5%. Next year, the target duration is 5 years. What is the portfolio weight invested in the perpetuity?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter6: Fixed-income Securities: Characteristics And Valuation

Section: Chapter Questions

Problem 8P

See similar textbooks

Similar questions

Suppose a 10-year, 10% semiannual coupon bond with a par value of 1,000 is currently selling for 1,135.90, producing a nominal yield to maturity of 8%. However, the bond can be called after 5 years for a price of 1,050. (1) What is the bonds nominal yield to call (YTC)? (2) If you bought this bond, do you think you would be more likely to earn the YTM or the YTC? Why?
You are managing a portfolio of $1 million. Your target duration is 10 years, and you can invest in two bonds, a zero-coupon bond with maturity of five years and a perpetuity, each currently yielding 5%.a. How much of (i) the zero-coupon bond and (ii) the perpetuity will you hold in your portfolio?b. How will these fractions change next year if target duration is now nine years?
You are managing a portfolio of $2 million. Your target duration is 13.5 years, and you choose to invest in a combination of a zero coupon bond with maturity six years and a perpetuity, each currently yielding 5%. The amounts of investment in the zero coupon and the perpetuity should be: $625,000 and $1,375,000 $1,375,000 and $625,000 $2,000,000 and $0 $1,000,000 and $1,000,000
Suppose you purchase a 30-year, zero-coupon bond with a face value of $100 and a yield to maturity of 6%. You hold the bond for five years before selling it. If the bond’s yield to maturity is 5% when you sell it, what is the internal rate of return of your investment?
You are considering the purchase of a new issue of bonds which will mature in 10 years. The coupon rate on this bond is 8% annually, with interest being paid every 6 months. If your portfolio has an average annual return of 6 % what is the most you would pay for this bond?
You buy a zero-coupon bond with a face value of $16,000 that matures in 10 years for $7,000. What is your annual compound rate of return?
Assume you have a 1-year investment horizon and are trying to choose among threebonds. All have the same degree of default risk and mature in 10 years. The first is azero-coupon bond that pays $1,000 at maturity. The second has an 8% coupon rateand pays the $80 coupon once per year. The third has a 10% coupon rate and paysthe $100 coupon once per year.1. If all three bonds are now priced to yield 8% to maturity, what are their prices?2. If you expect their yields to maturity to be 8% at the beginning of next year, whatwill their prices be then? What is your before-tax holding-period return on eachbond? If your tax bracket is 30% on ordinary income and 20% on capital gainsincome, what will your after-tax rate of return be on each?3. Recalculate your answer to (2) under the assumption that you expect the yields tomaturity on each bond to be 7% at the beginning of next year.
You are managing a portfolio of $1.0 million. Your target duration is 16 years, and you can choose from two bonds: a zero-coupon bond with maturity five years and a perpetuity, each currently yielding 5%. Required: a. How much of (i) the zero-coupon bond and (ii) the perpetuity will you hold in your portfolio? (Do not round intermediate calculations. Round your answers to 2 decimal places.) b. How will these fractions change next year if target duration is now fifteen years? (Do not round intermediate calculations. Round your answers to 2 decimal places.)
You are a financial manager and you have bonds worth $3,000,000 in your portfolio which have a 7 percent coupon rate and will be maturing in 10 years from now. What type of risk exposure do you face on these bonds? Suppose a futures contract on these bonds is available with a standard contract size of US$300,000 per contract. How will you hedge your exposure? If the market interest rates change to 9 percent, what will be your position?
Suppose you purchase a $1,000 bond with a coupon rate of 8% matures in 5 years at par, and you plan to sell it at the end of 3 years at the prevailing market price. When you purchase the bond, your investment advisor predicts that similar bonds with 2 years to maturity yield at 6%. What is the expected yield to maturity on the bond?
Consider the following annual coupon bond with a face value of $1,000, a price of $986.24, a coupon rate of 5.9% and a maturity of 30 years. Right after you purchase the bond, market interest rates change to 12% and remain constant for the next ten years. What would be your realized yield to maturity if you sold the bond after 10 years?
Assume you have a 1-year investment horizon and are trying to choose among three bonds. All have the same degree of default risk and mature in 10 years. The first is a zero-coupon bond that pays $1,000 at maturity. The second has an 8% coupon rate and pays the $80 coupon once per year. The third has a 10% coupon rate and pays the $100 coupon once per year.a. If all three bonds are now priced to yield 8% to maturity, what are the prices of: (i) the zero-coupon bond; (ii) the 8% coupon bond; (iii) the 10% coupon bond?b. If you expect their yields to maturity to be 8% at the beginning of next year, what will be the price of each bond?c. What is your before-tax holding-period return on each bond? d. If your tax bracket is 30% on ordinary income and 20% on capital gains income, what will be the after-tax rate of return on each bond?e. Recalculate your answers to parts (b)–(d) under the assumption that you expect the yields to maturity on each bond to be 7% at the…