Question:
Noah Kramer, a fixed-income
portfolio manager based in the country of Sevista, is considering the purchase of a Sevista government bond. Kramer decides to evaluate two strategies for implementing his investment in Sevista bonds. Table A gives the details of the two strategies, and Table B contains the assumptions that apply to both strategies. Before choosing one of the two bond-investment strategies, Kramer wants to analyze how the market value of the bonds will change if an instantaneous interest rate shift occurs immediately after his investment. The details of the interest rate shift are shown in Table C.
Calculate, for the instantaneous interest rate shift shown in Table C, the percent change in the market value of the bonds that will occur under eachstrategy.
Portfolio
A portfolio is a grouping of financial assets such as stocks, bonds, commodities, currencies and cash equivalents, as well as their fund counterparts, including mutual, exchange-traded and closed funds. A portfolio can also consist of non-publicly...
Transcribed Image Text:
Table A 5-Year Maturity (Modified Duration 4.83) 15-Year Maturity (Modified Duration 14.35) 25-Year Maturity (Modified Investment strategies (amount Strategy Duration 23.81) are market value invested) $5 million $5 million $10 million Table B Market value of bonds Bond maturities Bond coupon rates Target modified duration $10 million 5 and 25 years or 15 years 0.00% (zero coupon) 15 years Investment strategy assumptions Table C Instantaneous interest after investment Maturity Intrest Rate Change 5 year Down 75 basis points bps)rate shift immediately 15 year Up 25 bps 25 year Up 50 bps