INVESTMENTS (LOOSELEAF) W/CONNECT
11th Edition
ISBN: 9781260465945
Author: Bodie
Publisher: MCG
expand_more
expand_more
format_list_bulleted
Concept explainers
Question
Chapter 16, Problem 5CP
A
Summary Introduction
To calculate: Duration of the 4.75% treasury security and total bond portfolio.
Introduction: Effective duration of the portfolio established a relationship between price of portfolio and bond yield after the maturity period. It says about changes in price and resulting changes in yields.
B
Summary Introduction
To explain: Circumstances when portfolio price sensitivity is equal to the non callable treasury security having same duration.
Introduction: The bond portfolio consist zero coupon bonds in it. Thus the duration of both means bond portfolio as well as zero coupon bond will be equal.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solutionStudents have asked these similar questions
Maria VanHusen, CFA, suggests that using forward contracts on fixed-income securities can be used to protect the value of the Star Hospital Pension Plan’s bond portfolio against the possibility of rising interest rates. VanHusen prepares the following example to illustrate how such protec-tion would work:∙ A 10-year bond with a face value of $1,000 is issued today at par value. The bond pays an annual coupon.∙ An investor intends to buy this bond today and sell it in 6 months.∙ The 6-month risk-free interest rate today is 5% (annualized).∙ A 6-month forward contract on this bond is available, with a forward price of $1,024.70.∙ In 6 months, the price of the bond, including accrued interest, is forecast to fall to $978.40 as a result of a rise in interest rates.a. Should the investor buy or sell the forward contract to protect the value of the bond against rising interest rates during the holding period?b. Calculate the value of the forward contract for the investor at the maturity of…
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.
A pension fund faces a promised outflow of $5 million in 6 years. Its managers plan to dedicate a portfolio comprised of the following two bonds to meet this obligation.
a. What must be the proportions ((W7, W6) or (Weight(A), Weight(B)) of the two bonds in this 2-security portfolio to immunize it against changes in interest rates?
b. What is the yield to maturity for the immunized portfolio?
c. How much needs to be invested in each bond to build an immunized portfolio with an expected value of $5 million in 6 years?
d. Suppose that it is now 3 years later and that there has been a parallel increase in interest rates of 2%. Explain how immunization at least partially protects this portfolio. That is, what are the sources of losses and gains associated with each of the bonds caused by the increase in interest rates? How do they offset each other?
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
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- The following table shows the average returns for some of the largest mutual funds commonly found in retirement plans. (Assume end-of-month deposits and withdrawals and monthly compounding, and assume that the quoted rate of return continues indefinitely.) MutualFund FidelityGrowthCompany Vanguard500 Index PIMCOTotal Return VanguardTotal BondMarket Index Rate ofReturn 14.83% 14.25% 3.77% 3.67% Type Stock fund Stock fund Bond fund Bond fund How much should you pay each month into a retirement account invested in the Vanguard bond fund if you wish to retire in 25 years with an investment valued at one million dollars? HINT [See Quick Example 2.] (Round your answer to the nearest cent.)arrow_forwardIf the overnight fed funds rate is quoted as 2.25 percent, what is the bond equivalent rate? Calculate the bond equivalent rate on fed funds if the quoted rate is 3.75 percent.I saw in the internet that the answer is 2.25(365/360)=2.28 and 3.75(365/360)= 3.80:is that correct? if yes, where do 365/360 came from?arrow_forwardThe following table shows the average returns for some of the largest mutual funds commonly found in retirement plans. (Assume end-of-month deposits and withdrawals and monthly compounding, and assume that the quoted rate of return continues indefinitely.) Mutual Fund Fidelity Growth Company Vanguard 500 Index PIMCO Total Return Vanguard Total Bond Market Index Rate of Return 14.83% 14.25% 3.77% 2.67% Type Stock fund Stock fund Bond fund Bond fund How much should you pay each month into a retirement account invested in the Vanguard bond fund if you wish to retire in 25 years with an investment valued at two million dollars? HINT (See Quick Example 2.] (Round your answer to the nearest cent.)arrow_forward
- Rossiana Marie, Inc. lists a bond as Ross 9s34, and shows the price as selling for 88.875% of its face value. If your required return rate is 10%, Is it good to buy one of these bonds in 2021?arrow_forwardToday is 1 July, 2019. Hélène has a portfolio which consists of two different types of financial instruments (henceforth referred to as instrument A and instrument B). Hélène purchased all instruments on 1 July 2012 to create this portfolio, which is composed of 30 units of instrument A and 50 units of instrument B. Instrument A is a zero-coupon bond with a face value of $100. This bond matures at par. Its maturity date is 1 January 2029. Instrument B is a Treasury bond with a coupon rate of j2 = 3.46% p.a. and a face value of $100. This bond matures at par. Its maturity date is 1 January 2022. Calculate the current price of instrument B per $100 face value. Round your answer to four decimal places. Assume the yield rate is j2 = 3.52% p.a. and Hélène has just received her coupon payment. a.$99.8306 b.$99.8576 c.$101.5876 d.$99.4771arrow_forwardSuppose you are a bond dealer looking for arbitrage opportunities. The first column in the table below shows the current prices of the four government bonds (without default risk). Assume that you can buy and short these bonds at a given price. The remaining columns of the table are the cash flows generated by the bonds at the end of the first, second and third years. All bonds mature at the end of the third year. Are there arbitrage opportunities for the prices of these four types of bonds? If it exists, how can you seize this opportunity?arrow_forward
- Rossiana Marie, Inc. lists a bond as Ross 9s34 and shows the price as selling for 88.875% of its face value. If your required return rate is 10%, would you buy one of these bonds in 2021?arrow_forwardhe following information is about the spot rates on Treasury securities and BBB corporate bond: Spot 1 Year Spot 2 Year Spot 3 Year Treasury 3% 4.75% 5.5% BBB Corporate Debt 7.5% 9.15% 10.5% Question: What is the implied forward rates on one-year maturity BBB corporate debt to be delivered in year 3?arrow_forwardToday is 1 July 2021. Joan has a portfolio which consists of two different types of financial instruments (henceforth referred to as instrument A and instrument B). Joan purchased all instruments on 1 July 2016 to create this portfolio and this portfolio is composed of 242 units of instrument A and 455 units of instrument B. Instrument A is a zero-coupon bond with a face value of 100. This bond matures at par. The maturity date is 1 January 2030. Instrument B is a Treasury bond with a coupon rate of j2 = 3.14% p.a. and face value of 100. This bond matures at par. The maturity date is 1 January 2024. (a) Calculate the current price of instrument A per $100 face value (today's value). Round your answer to four decimal places. Assume the yield rate is j2 =3.93% p.a.arrow_forward
- AAA bond appraiser recently received a request from an investment client for advice on Tesla bond valuation. When the relevant bond (Tesla 30) information is as follows, how much should the AAA bond appraiser provide the appropriate value for the Tesla 30 to the investment customer? -The face value of Tesla 30 bond is $1,000, YTM is 8.32%, maturity is 5 years, bond interest payment method is semi-annual payment, par interest rate is 7.5%, but calculation should be rounded to the third decimal place.arrow_forwardIt is August 2 and a fund manager invested in $10 million government bonds (trading at par) is concerned about an increase in interest rates over the next 3 months. The manager decides to use the T-bond futures contract to hedge the portfolio. Current futures price is 93-02. The modified duration on the bond portfolio is 6.80 years. The CTD issue has a modified duration of 9.2 years. Devise a hedge for the manager? (Hint: You need to find the PVBP of the portfolio and the futures contract using the following formula: PVBP = - Modified Duration * P * 0.01%.).arrow_forwardAn investor gathers the following data on three newly-issued bonds: 1-year government bond, 3.0% yield 1-year ABC corporate bond, 4.2% yield 10-year government bond, 3.8% yield If investors require a 0.5% liquidity premium for corporate bonds, what are the components of the required return on a 10-year ABC bond?arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
- Essentials Of InvestmentsFinanceISBN:9781260013924Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.Publisher:Mcgraw-hill Education,
- Foundations Of FinanceFinanceISBN:9780134897264Author:KEOWN, Arthur J., Martin, John D., PETTY, J. WilliamPublisher:Pearson,Fundamentals of Financial Management (MindTap Cou...FinanceISBN:9781337395250Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage LearningCorporate Finance (The Mcgraw-hill/Irwin Series i...FinanceISBN:9780077861759Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan ProfessorPublisher:McGraw-Hill Education
Essentials Of Investments
Finance
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:9780134897264
Author:KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:Pearson,
Fundamentals of Financial Management (MindTap Cou...
Finance
ISBN:9781337395250
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i...
Finance
ISBN:9780077861759
Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:McGraw-Hill Education
BIG Problem with Bond Investing Today!!!; Author: Learn to Invest - Investors Grow;https://www.youtube.com/watch?v=1ScT15of0Vo;License: Standard Youtube License