Consider the following bonds: Bond A 15 years 10% $1000 Assume the current term structure is...
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Consider the following bonds: Bond A 15 years 10% $1000 Assume the current term structure is flat at 12% p.a. a. [2 marks] In the context of a bond portfolio, what is duration? Why is it important? b. [5 marks] Calculate the duration of each of the bonds above. c. [2 marks] In the context of a bond portfolio, what is convexity? Why is it important? Maturity Coupon rate Par value n-1 Tử phi k=1 Bond B 11 years 5% $1.000 d. [5 marks] Determine a measure of convexity for each of the bonds above. The following result may be useful: -n² + 2n − 1)xn+2+ (2n² - 2n-1)xn+¹ = n²x² + x² + x (1 - x)³ e. [2 marks] What is meant by the term 'horizon rate of return?' Why is this a useful measure of future investment performance? f. [3 marks] Suppose you have a defensive strategy, and that you want to immunise the investor who has bought the above bonds. What is each bond's horizon rate of return at a horizon equal to duration if interest rates jump from 12% to either 10% or 14% immediately after buying each of the bonds? g. [3 marks] Consider now an active style of management, whereby your horizon is one year only. Again, what is each bond's horizon rate of return at a horizon equal to one year if interest rates keep jumping from 12% to either 10% or 14%? h. [1 mark] In conclusion, which bond would you choose? Consider the following bonds: Bond A 15 years 10% $1000 Assume the current term structure is flat at 12% p.a. a. [2 marks] In the context of a bond portfolio, what is duration? Why is it important? b. [5 marks] Calculate the duration of each of the bonds above. c. [2 marks] In the context of a bond portfolio, what is convexity? Why is it important? Maturity Coupon rate Par value n-1 Tử phi k=1 Bond B 11 years 5% $1.000 d. [5 marks] Determine a measure of convexity for each of the bonds above. The following result may be useful: -n² + 2n − 1)xn+2+ (2n² - 2n-1)xn+¹ = n²x² + x² + x (1 - x)³ e. [2 marks] What is meant by the term 'horizon rate of return?' Why is this a useful measure of future investment performance? f. [3 marks] Suppose you have a defensive strategy, and that you want to immunise the investor who has bought the above bonds. What is each bond's horizon rate of return at a horizon equal to duration if interest rates jump from 12% to either 10% or 14% immediately after buying each of the bonds? g. [3 marks] Consider now an active style of management, whereby your horizon is one year only. Again, what is each bond's horizon rate of return at a horizon equal to one year if interest rates keep jumping from 12% to either 10% or 14%? h. [1 mark] In conclusion, which bond would you choose?
Expert Answer:
Answer rating: 100% (QA)
a Duration is a measure of the sensitivity of a bond or a bond portfolio to changes in interest rates It represents the weighted average time it takes to receive the present value of all cash flows fr... View the full answer
Related Book For
Principles of Corporate Finance
ISBN: 978-1260013900
13th edition
Authors: Richard Brealey, Stewart Myers, Franklin Allen
Posted Date:
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