MCB has just issued a guaranteed investment contract (GIC). MCB needs to immunize this GIC, which...

 

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MCB has just issued a guaranteed investment contract (GIC). MCB needs to immunize this GIC, which guarantees a single payment of USD160,000,000 in 4 years and provides a bond equivalent yield of approximately 3.50%. The investment team calculated the present value of the GIC to be USD 145,700,000. This is the amount they intend to invest today to immunize the GIC. WB is not permitted to use leverage and the current duration is 4. MCB is building a suitable portfolio and already holds the U.S. goverment bonds shown in Exhibit 1. Bond Bond A Bond B Bond X Bond Y Bond Z Market Price (USD) 102.32 94.9 Bond Existing Portfolio Bonds Total Market Value (USD) 49,113,600 59,630,000 MCB must choose a U.S. government bond to complete the immunized portfolio. The investment team has gathered the data shown in Exhibit 2. Bonds Available to Complete Immunized Portfolio Market Price (USD) Yield to Maturity 99.97 3.52% 99.36 3.89% 99.35 3.85% Total Dollar Duration 954,278 4,209,878 Modified Duration 1.333 2.154 1.810 (i) What are the assumptions of a classical immunization strategy? (ii) Determine which bond (X, Y, or Z) is the most suitable for MCB to complete the immunized portfolio. Justify your response with one reason. Show your calculations. (iii) What are the risks associated with holding a portfolio of bonds? MCB has just issued a guaranteed investment contract (GIC). MCB needs to immunize this GIC, which guarantees a single payment of USD160,000,000 in 4 years and provides a bond equivalent yield of approximately 3.50%. The investment team calculated the present value of the GIC to be USD 145,700,000. This is the amount they intend to invest today to immunize the GIC. WB is not permitted to use leverage and the current duration is 4. MCB is building a suitable portfolio and already holds the U.S. goverment bonds shown in Exhibit 1. Bond Bond A Bond B Bond X Bond Y Bond Z Market Price (USD) 102.32 94.9 Bond Existing Portfolio Bonds Total Market Value (USD) 49,113,600 59,630,000 MCB must choose a U.S. government bond to complete the immunized portfolio. The investment team has gathered the data shown in Exhibit 2. Bonds Available to Complete Immunized Portfolio Market Price (USD) Yield to Maturity 99.97 3.52% 99.36 3.89% 99.35 3.85% Total Dollar Duration 954,278 4,209,878 Modified Duration 1.333 2.154 1.810 (i) What are the assumptions of a classical immunization strategy? (ii) Determine which bond (X, Y, or Z) is the most suitable for MCB to complete the immunized portfolio. Justify your response with one reason. Show your calculations. (iii) What are the risks associated with holding a portfolio of bonds?

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i The assumptions of a classical immun ization strategy are 1 That there are no transactions costs o... View the full answer