1) Critically analyze the case

2) Check the YTM and Duration of the bond calculated by Jill and make your comments.

3) Calculate Modified Duration and Convexity?

4) By how much the given inflation will affect the bond Price?

5) Lastly suggest whether we can buy this bond for the quoted price?

Jill Dougherty was hired as an investment analyst by A.M. Smith Inc. for the Cincinnati, Ohio office based on her sound academic credentials, which included an MBA
from a top ranking university and a CFA designation. at the time of her recruitment she was told that one of her responsibilities would be to conduct educational seminars for current and prospective clients. A.M. Smith Inc, a prestigious investment firm, with branches in 30 major metropolitan areas, had achieved most of its success due to its excellent client relations and focus on client support. The firm ranked among the very best in terms of the number of successful equity underwriting deals undertaken. Recently, a large utility company had hired it as the leading investment bankers, for a major corporate bond issue. Since most of its retail customers were more familiar with stock investments, John Sullivan, the branch Manager at the Cincinnati office, asked to prepare and present a seminar outlining the various implications of fixed income investments. About 60% of our investors are in the 55+ age group. Jill, so we should not have much trouble convincing them of the benefits of investing in bonds remarked John. “However, they may need clarifications regarding various terms and concept associated with fixed income investing. Your job is to convince them of the relative safety and income potential of corporate bonds" said John.

In preparation for the seminar, Jill called up a few of her best clients and queried them regarding their awareness of the risk and return potential associated with corporate bond investments. She realized that apart from a good knowledge about the current level and stability of interest rates and inflation, most customers were not very familiar about the finer aspects of bond investing Bond features like call-ability, convertibility, sinking fund provision, bond ratings, debentures, interest rate risk, were not well understood by most of the clients she interviewed. Most of them seemed awfully interested in Knowing more about the opportunities offered by bond investing and Jill Knew that she would have a good turnover at the seminar.

She decided to refer back to her finance textbook and dig out some definitions and examples that she could use in her Power Point presentation. She downloaded current data for outstanding bonds of various maturities, rating, and coupon rates( see table1) and started preparing her slides. For study purpose she assumed that she try to prove them by investing in 2 different bonds one by one on their maturity the yield is increased.

Corporate Bond information Issuer Face coupon maturity Quoted years until Sinking Value Rate premium Maturity Fund ABC

Energy $1,000 7% 3% $795.1 3 yes

Suzlon $1000 6% 3% $1000 3 Yes

In the Presentation she calculated the duration and YTM of the bond and she said the yield is around 18% and the duration of the bond is 4.5 years and the required rate of return is 15% and calculated the bond convexity as 25$. When she reported the same to his boss, then the boss enquired what will happen to the bond price if the inflation in the month is 8%. I did not really prepare for it. Can u help me in preparing the same?

Answer rating: 100% (QA)

1 Critically analyze the case ANSWER There are several things that Jill could have done differently in order to more effectively convince her clients ... View the full answer