Ms Koko is a bond portfolio manager who supports the pure expectations theory of the term...

 

Transcribed Image Text:

Ms Koko is a bond portfolio manager who supports the pure expectations theory of the term structure of interest rates. Her portfolio includes two bonds issued by the same institution (Bond A and Bond B). Both bonds have 5 years remaining to maturity, a R10 000 par value, and both have semiannual coupons of 8% p.a. Bond A is option free and currently trades at a price of 101.4723. Bond B is callable at any time beginning one year from today and currently trades at a price of 102.3482. Ms Koko has received funds of R100 000 which she would like to use to increase her investment in one of the bonds (either Bond A or Bond B). She observes an inverted yield curve, and decides to allocate the additional funds to Bond A. Based on her expectations, is Koko's decision correct or incorrect? Justify your answer. (4) Ms Koko is a bond portfolio manager who supports the pure expectations theory of the term structure of interest rates. Her portfolio includes two bonds issued by the same institution (Bond A and Bond B). Both bonds have 5 years remaining to maturity, a R10 000 par value, and both have semiannual coupons of 8% p.a. Bond A is option free and currently trades at a price of 101.4723. Bond B is callable at any time beginning one year from today and currently trades at a price of 102.3482. Ms Koko has received funds of R100 000 which she would like to use to increase her investment in one of the bonds (either Bond A or Bond B). She observes an inverted yield curve, and decides to allocate the additional funds to Bond A. Based on her expectations, is Koko's decision correct or incorrect? Justify your answer. (4)

Answer rating: 100% (QA)

Ms Kokos decision to allocate the additional funds to Bond A is likely incorrect given the information provided especially in the context of an inverted yield curve Lets break down the factors to unde... View the full answer