Jules Bianchi is a bond analyst for Maneval Investments, Inc. Bianchi gathers data on three corporate...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Jules Bianchi is a bond analyst for Maneval Investments, Inc. Bianchi gathers data on three corporate bonds, as shown in Exhibit 1. EXHIBIT 1 Selected Bond Data Issuer Ayrault, Inc. (AI) Blum, Inc. (BI) Cresson Enterprises (CE) Coupon Rate 5.25% 5.25% 5.25% Price 100.200 EXHIBIT 2 Binomial Interest Rate Trees 101.300 102.100 Note: Each bond has a remaining maturity of three years, annual coupon payments, and a credit rating of BBB. 3.7000% To assess the interest rate risk of the three bonds, Bianchi constructs two binomial interest rate trees based on a 10% interest rate volatility assumption and a current one-year rate of 4%. Panel A of Exhibit 2 provides an interest rate tree assuming the benchmark yield curve shifts down by 30 bps, and Panel B provides an interest rate tree assuming the benchmark yield curve shifts up by 30 bps. Bianchi determines that the AI bond is currently trading at an option- adjusted spread (OAS) of 13.95 bps relative to the benchmark yield curve. Bond Description Callable at par in one year and two years from today Option-free Putable at par in one year from today A. Interest Rates Shift Down by 30 bps Year 0 Year 1 5.1968% 4.2548% Year 2 7.0037% 5.7342% 4.6947% Jules Bianchi is a bond analyst for Maneval Investments, Inc. Bianchi gathers data on three corporate bonds, as shown in Exhibit 1. EXHIBIT 1 Selected Bond Data Issuer Ayrault, Inc. (AI) Blum, Inc. (BI) Cresson Enterprises (CE) Coupon Rate 5.25% 5.25% 5.25% Price 100.200 EXHIBIT 2 Binomial Interest Rate Trees 101.300 102.100 Note: Each bond has a remaining maturity of three years, annual coupon payments, and a credit rating of BBB. 3.7000% To assess the interest rate risk of the three bonds, Bianchi constructs two binomial interest rate trees based on a 10% interest rate volatility assumption and a current one-year rate of 4%. Panel A of Exhibit 2 provides an interest rate tree assuming the benchmark yield curve shifts down by 30 bps, and Panel B provides an interest rate tree assuming the benchmark yield curve shifts up by 30 bps. Bianchi determines that the AI bond is currently trading at an option- adjusted spread (OAS) of 13.95 bps relative to the benchmark yield curve. Bond Description Callable at par in one year and two years from today Option-free Putable at par in one year from today A. Interest Rates Shift Down by 30 bps Year 0 Year 1 5.1968% 4.2548% Year 2 7.0037% 5.7342% 4.6947%
Expert Answer:
Answer rating: 100% (QA)
SOLUTION To determine the effective duration for the AI bond we need to calculate the price change of the bond given the changes in the yield curve Fr... View the full answer
Related Book For
Investment Analysis and Portfolio Management
ISBN: 978-0538482387
10th Edition
Authors: Frank K. Reilly, Keith C. Brown
Posted Date:
Students also viewed these finance questions
-
Managing Scope Changes Case Study Scope changes on a project can occur regardless of how well the project is planned or executed. Scope changes can be the result of something that was omitted during...
-
Mike Smith, CFA, an analyst with Blue River Investments, is considering buying a Montrose Cable Company Corporate bond. He has collected the balance sheet and income statement information for...
-
Research various global financial services organizations (for example, UBS AG, E-Trade, Schwab, ING, Bank of America, HSBC, RBS) through their company websites and other publicly available...
-
When VGS = 0.5 VGS(off) . gm. is -------------- the maximum value. Select one: a. one-fourth b. three-fourths c. equal to d. one-half
-
Multiple Choice. Choose the best answer. 1. The FASBs objectives of financial reporting for not-for-profit organizations include all of the following except: a. Making resource allocation decisions....
-
Electrical experiments usually involve the reading of meters such as the voltmeters shown. a. What is the reading shown by each voltmeter, and the uncertainty in each reading? b. The voltmeters show...
-
The A-36 steel bar consists of two segments, one of circular cross section of radius \(r\), and one of square cross section. If the bar is subjected to the axial loading of \(P\), determine the...
-
At the beginning of last year, Diekow Productions, set direct labor standards of 20 hours at $15 per hour for each product produced. During the year, 20,500 direct labor hours were actually worked at...
-
Prove 1+ cos = sine @= 1-cos e Prove 1-cos 20+ sin 20 1+ cos 20+ sin 28 tan e
-
a. Would you consider the presentation to be a multiple-step income statement or a single-step income statement? Comment. b. Does it appear that there is a 100% ownership in all consolidated...
-
Solve the system: (4x-3y = 5 -8x+6y= -10
-
What was the GDP Growth Rate and Inflation Rate during 1st Quarter of this year (2023)? In the current scenario, what should be the appropriate mix of fiscal policy and monetary policy? Cite source...
-
Initially when facing w = $40 per hour Ella chooses to work 8 hours per day and have 16 hours of free time per day. Using a fully labelled diagram describe Ella's utility maximizing combination of...
-
Of all the research designs discussed in this course, which design is best suited to address your problem statement and research questions? Explain. Why are the other designs addressed in this course...
-
Sammy works 1,000 hours and earns $11,000 annually. Consumption is on the y-axis and leisure is on the x-axis. What is the slope of his budget constraint? How much consumption will he have if he...
-
Bruke adibas is analyzing interest rate in country Y as part of the presentation on the state of economy. The nominal interest rate for country Y is 6% and the inflation rate is 2%. According to...
-
Tucker Inc. performed its lower-of-cost-or-market (LCM) analysis at the end of the year with the following results for two of its products: Product A $200 $225 Description Cost per unit Designated...
-
Use translations to graph f. f(x) = x-/2 +1
-
It is March 9, and you have just entered into a short position in a soybean meal futures contract. The contract expires on July 9 and calls for the delivery of 100 tons of soybean meal. Further,...
-
To protect the value of the Star Hospital Pension Plan's bond portfolio against the rising interest rates that she expects, Sandra Kapple enters into a one-year pay fixed, receive floating U.S. LIBOR...
-
The treasurer of a British brewery is planning to enter a plain vanilla, three-year, quarterly settlement interest rate swap to pay a fixed rate of 8 percent and to receive three-month sterling...
-
This is a two-dimensional parallel channel with a corrugated plate (sine curve), which the distance between the upper and lower walls is h, Prove that is a solution to the subsonic linearization...
-
The experiment of airfoil NACA006 was carried out in subsonic wind tunnel, and the slope of lift curve d at a = 0 was measured as Try to plot experimental curve and compare with the results from...
-
Under the linearized condition, please write down the formulation of the definite solution problem of the velocity potential function of supersonic flow? The linearized expression of the wall...
Study smarter with the SolutionInn App