The Harvard Management Company and Inflation-Protected Bonds Essay

In your report, identify which of the portfolios are not part of the efficient set when the correlation is

e. If we evaluated at the same effective rate, the earlier payments would give the semiannual bond the higher value.

Inflation erodes the purchasing power of a bond 's future cash flows. A rise in inflation will cause investors to demand higher yields to compensate for inflation rate risk. Also, prices will tend to drop because the bond will be paying interest with less purchasing power.

Markowitz contribution showed that the benefits of diversification depend not just on risking individual assets but also on how the asset returns interact with each other, or the correlation between returns.

3. A 2 – year Treasury security currently earns 5.13%. Over the next 2 years, the real

(a) The mean excess return, standard deviation, and portfolio weights for the minimum variance portfolio.

Harry Markowitz 1991, developed a theory of “Portfolio choice”, that allows the investors to examine the risk as per the expected returns. In modern World, this theory is known as Modern portfolio theory (MPT). It attempts to attain the best portfolio expected return for a predefined portfolio risk, or to minimise the risk for the predefined expected returns, by a careful choice of assets. Though it’s a widely used theory, still has been challenged widely. The critics question the feasibility of theory as a strategy for

Government: Commonwealth, state and government trading enterprises D. Overseas—the rest of the world 6. The risk that impacts specifically on the share price of a particular company is called: A. economic risk B. business risk C. systematic risk D. unsystematic risk 7. When investors buy and sell shares based on receiving new information on shares and markets, this is known as: A. active investment B. a diversified strategy C. a market replication strategy D. passive investment 8. To track the S&P500, a fund manager can buy: A. all the stocks in the S&P500 B. an S&P500 index fund C. a percentage of stocks that essentially tracks the index D. All of the given answers. 9. The correlation of pairs of securities within a portfolio is called: A. co-association B. correspondence C. covariance D. variance 10. The correlation between two shares: A. can take on positive values

2. What is the difference between the coupon rate and the YTM of bonds? (10 pts)

Correct Answer:    Question: Compute the duration of a par value bond with a coupon rate of 8% and a remaining time to maturity of 3  years. Assume coupon interest is paid annually and the bond has a face value $100.  Correct Answer:    Question: The duration of a bond that pays coupon interest annually is 8.05 years. The yield to maturity of the bond  is 10%. If the yield falls by 25 basis points, what is the percentage change in the price of the bond?  Correct Answer:    Question: Which of the following are true about the interest‐rate sensitivity of coupon bonds?   I     Bond prices and yields are inversely related.  II    Prices of long‐term bonds tend to be more sensitive to interest rate changes than prices of short‐term bonds.  III   Interest‐rate risk is directly related to the bond's coupon rate.  IV    The sensitivity of a bond's price to a change in its yield to maturity is inversely related to the yield to maturity at  which the bond is currently selling.    Correct Answer:    Question:  You have an obligation to pay $148 in four years and 2 months. In which bond would you invest your  $100 to accumulate this amount, with relative certainty, even if the yield on the bond declines to 9.5% immediately  after you purchase the bond? All bonds pay interest annually and have a face value of $100.     Selected Answer:

Inflation rate risk, when inflation goes up, the price of the bond usually goes down.

In this case, the Partner’s Treasury Department has computed all the portfolios for minimum level of risk with different types of assets, more specifically, adding Real Estate Investment Trusts (REITs), Commodities or both, from an undefined approach. Since the results are identical as calculated from Mean-Variance Theory, they should be the optimal portfolios for each target level of return. Therefore a graph with efficient frontier, which represents the optimal portfolios with different assets, is constructed based on Exhibit 5 to 8 for comparison. [Appendix B] Technically, any portfolio on the efficient frontier is an optimized portfolio and is indifferent from each other in terms of risk/return trade off.

Through this method, we obtained theoretical yields of the 4.25% coupon bond and 10.625% coupon bond to be 2.899% and 2.639% respectively. The corresponding theoretical prices of the bonds are $108.27 for the 4.25% coupon bond and $149.31 for the 10.625% coupon bond (see Table 1 above).

Traditional treasury bonds have a fixed and permanent debt payments. Because the principal and the coupon rate is fixed, changes in interest rates in the economy, the

303). Subsequently issued bonds after the drop in yen bonds, in the short-term, will probably be set with lower coupon rates making the fixed terms of the already issued dual-currency bond valuable.