You expected a cut in interest rate, the yield curve will change where short term interest rate will decrease 200bps, medium will decrease 160 bps and long term decrease 150bps. Bond Modified duration Convexity measure A Short 1.3 2 B Medium 6 30 C Long 14 400 The bonds in the table are zero coupon bonds and duration are in years. Portfolio Strategy A: Invest 10m in bond A and 10m in bond c. Portfolio Strategy B: Invest 20m in bond b. Calculate the expected return of each strategy, and explain which strategy should be used to deal with the decrease in interest rate. And does the strategy increase or decrease forward looking tracking error of the portfolio?

You expected a cut in interest rate, the yield curve will change where short term interest rate will decrease 200bps, medium will decrease 160 bps and long term decrease 150bps. Bond Modified duration Convexity measure A Short 1.3 2 B Medium 6 30 C Long 14 400 The bonds in the table are zero coupon bonds and duration are in years. Portfolio Strategy A: Invest 10m in bond A and 10m in bond c. Portfolio Strategy B: Invest 20m in bond b. Calculate the expected return of each strategy, and explain which strategy should be used to deal with the decrease in interest rate. And does the strategy increase or decrease forward looking tracking error of the portfolio?

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter4: Bond Valuation

Section: Chapter Questions

Problem 16P: Interest Rate Sensitivity A bond trader purchased each of the following bonds at a yield to maturity...

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