You are an Investment Analyst at MSC INC. On 25/08/2020 a new client has tasked you...

 

 

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You are an Investment Analyst at MSC INC. On 25/08/2020 a new client has tasked you with investing $200m in the following two US corporate bonds equally: AOL Bond Coupon Par T (years) i 10% $1,000 3 10% GNU Bond 8% $1,000 5 12% Your client instructs you that they wish to benefit from changes in the yield to maturity and insists that you actively manage the portfolio moving funds on a daily basis. On the 26/08/2020 the Federal Reserve announces an imminent increase in the Federal Funds rate by 1.5%. Your analysis indicates that the respective yield to maturities on AOL and GNU bonds will rise by the same amount as the announced increase in the Federal Funds Rate. Required: a) Compute the Price, Duration, Modified Duration and Convexity factor of AOL and GNU bonds using the information in the table above. [40 marks] b) Accounting for convexity, produce forecasts of the respective price changes in each individual bond and compute the assumed portfolio value at the end of trading on 26/08/2020. Hint: In order to compute the portfolio value after the Federal Funds rate increase, you need to first calculate the number of bonds initially bought on 25/08/2020. You may round this to the nearest whole number. [40 marks] c) Write a report on the relationship between bond prices and yield to maturity. Your answer should reference two techniques used to forecast bond price changes and talk about the real-world implications of convexity. You are an Investment Analyst at MSC INC. On 25/08/2020 a new client has tasked you with investing $200m in the following two US corporate bonds equally: AOL Bond Coupon Par T (years) i 10% $1,000 3 10% GNU Bond 8% $1,000 5 12% Your client instructs you that they wish to benefit from changes in the yield to maturity and insists that you actively manage the portfolio moving funds on a daily basis. On the 26/08/2020 the Federal Reserve announces an imminent increase in the Federal Funds rate by 1.5%. Your analysis indicates that the respective yield to maturities on AOL and GNU bonds will rise by the same amount as the announced increase in the Federal Funds Rate. Required: a) Compute the Price, Duration, Modified Duration and Convexity factor of AOL and GNU bonds using the information in the table above. [40 marks] b) Accounting for convexity, produce forecasts of the respective price changes in each individual bond and compute the assumed portfolio value at the end of trading on 26/08/2020. Hint: In order to compute the portfolio value after the Federal Funds rate increase, you need to first calculate the number of bonds initially bought on 25/08/2020. You may round this to the nearest whole number. [40 marks] c) Write a report on the relationship between bond prices and yield to maturity. Your answer should reference two techniques used to forecast bond price changes and talk about the real-world implications of convexity.

Answer rating: 100% (QA)

a AOL Bond Price 10001013 7413 Duration 3 years Modified Duration 3 years101 27 years Convexity 6 years GNU Bond Price 100010085 5761 Duration 5 years ... View the full answer