INVESTMENTS (LOOSELEAF) W/CONNECT
11th Edition
ISBN: 9781260465945
Author: Bodie
Publisher: MCG
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Chapter 16, Problem 17PS
Summary Introduction
Adequate information
| Characteristic pertaining to fixed rate note and fixed rate bond | ||
| Price | Fixed Rate Bond | Fixed Rate Note |
| Price | 107.18 | 100 |
| YTM | 5% | 5% |
| Time remaining for maturity | 18 | 8 |
| Duration (Modified) | 6.9848 | 3.5851 |
To determine:
The most optimum strategy amongst the three, lengthen the portfolio duration, buy fixed rate bonds and shorten the portfolio duration.
Introduction:
Fixed rate bond is one of the kind of debt instrument which comprises of fixed interest (coupon) payment in comparison to floating rate bond. Fixed rate note is generally issued for a long period of time and has a predetermined rate of interest. Duration on the other hand, refers to the measure of price of bond sensitivity with respect to changes in the rate of interest.
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Frank Meyers, CFA, is a fixed-income portfolio manager for a large pension fund. A member of the Investment Committee, Fred Spice, is very interested in learning about the management of fixed-income portfolios. Spice has approached Meyers with several questions.Meyers decides to illustrate fixed-income trading strategies to Spice using a fixed-rate bond and note. Both bonds have semiannual coupon periods. Unless otherwise stated, all interest rate changes are parallel. The characteristics of these securities are shown in the following table. He also considers a 9-year floating-rate bond (floater) that pays a floating rate semiannually and is currently yielding 5%.
Characteristics of Fixed-Rate Bond and Fixed-Rate Note
Fixed-Rate Bond
Fixed-Rate Note
Price
107.18
100.00
Yield to maturity
5.00%
5.00%
Time to maturity (years)
18
8
Modified duration (years)
6.9848
3.5851
Spice asks Meyers to quantify price changes from changes in interest rates. To illustrate, Meyers…
Frank Meyers, CFA, is a fixed-income portfolio manager for a large pension fund. A member of the Investiment Committee, Fred Spice, is very interested in learning about the management of fixed-income portfolios. Spice has approached Meyers with several questions. Specifically, Spice would like to know how fixed-income managers position portfolios to capitalize on their expectations of future interest rates.
Meyers decides to illustrate fixed-income trading strategies to Spice using a fixed-rate bond and note. Both bonds have samiannual coupon periods. Unless otherwise stated, all interest rate (yield curve) changes are parallel. The characteristic of these securities are shown in the following table. He also considers a nine-year floating-rate bond (floater) that pays a floating rate semiannually and is currently yielding 5%.
Fixed-rate bond: price 107.18, YTM 5%, TMT (years) 18, modified duration (years) 6.9848.
Fixed-rate note: price 100, YTM 5%, TMT (years) 8, modified duration…
Amanda Sings is a financial adviser to a number of large institutional investors. She has determined five bond types which may be potential investments, suitable for her clients’ needs• Index-linked bond• Eurobond• Floating rate note• Zero-coupon bond• Municipal bond For each of the following clients, select the single bond type from the above list, which you consider most suitable, justify your selection in a single sentence 1. An investment fund which has expectations of a significant rise in interest rates in the future 2. A pension fund which pays future pensions uplifted by the Consumer Price Index (CPI) each year
3. A small pension fund, with limited human resources, seeking a long term investment with minimal need for monitoring and re-investment activity.
Chapter 16 Solutions
INVESTMENTS (LOOSELEAF) W/CONNECT
Ch. 16 - Prob. 1PSCh. 16 - Prob. 2PSCh. 16 - Prob. 3PSCh. 16 - Prob. 4PSCh. 16 - Prob. 5PSCh. 16 - Prob. 6PSCh. 16 - Prob. 7PSCh. 16 - Prob. 8PSCh. 16 - Prob. 9PSCh. 16 - Prob. 10PS
Ch. 16 - Prob. 11PSCh. 16 - Prob. 12PSCh. 16 - Prob. 13PSCh. 16 - Prob. 14PSCh. 16 - Prob. 15PSCh. 16 - Prob. 16PSCh. 16 - Prob. 17PSCh. 16 - Prob. 18PSCh. 16 - Prob. 19PSCh. 16 - Prob. 20PSCh. 16 - Prob. 21PSCh. 16 - Prob. 22PSCh. 16 - Prob. 23PSCh. 16 - Prob. 24PSCh. 16 - Prob. 25PSCh. 16 - Prob. 1CPCh. 16 - Prob. 2CPCh. 16 - Prob. 3CPCh. 16 - Prob. 4CPCh. 16 - Prob. 5CPCh. 16 - Prob. 6CPCh. 16 - Prob. 7CPCh. 16 - Prob. 8CPCh. 16 - Prob. 9CPCh. 16 - Prob. 10CPCh. 16 - Prob. 11CPCh. 16 - Prob. 12CPCh. 16 - Prob. 13CP
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