Consider the 3 bonds below. All coupon rates are annually compounded. The face value, coupon rate,...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Consider the 3 bonds below. All coupon rates are annually compounded. The face value, coupon rate, yield, maturity and market price are given. Based on past market prices, you have calculated the return of each bond and their respective standard deviations. These values indicate the potential capital return and capital risk of buying each bond. Bond Face Value Coupon 1 8% 2 3 $100 $100 $100 11% 9% March June Maturity Yield 10 yrs 9% 20 yrs 12% 25 yrs 15% Market Price Return St. dev. 10% $93.582342 $92.530556 $56.785571 = 15% 20% 12% 10% 15% Weight 25% 1. You create a portfolio with these 3 bonds with the weights given in the table. Calculate the duration of this portfolio. 2. Calculate the return and the variance of this portfolio. The pairwise correlations are corr2=-0.5 (minus 0.5); corr3= -0.2 (minus 0.2); corr23=-0.4 (minus 0.4). NOTES: (1) Ignore coupon payments when calculating the return of the portfolio. (2) The table gives the standard deviation of each bond (st. dev.), not its variance. 3. Calculate the tracking error of portfolio A relative to the Lehman Bond Index. The return of the Lehman Bond Index and the return of portfolio A are given in the table below. Fill in the table. 25% 50% Table 1: Quarterly percentage return of portfolio and Lehman Bond Index - in decimals Quarter Portfolio A Lehman Bond Index Return | Active Return | Differences Squared 0.068 0.067666667 0.009 0.007666667 September 0.053 0.051333333 December 0.0058 0.006633333 = Variance (sum of differences squared / 3) Standard Deviation = Tracking Error Consider the 3 bonds below. All coupon rates are annually compounded. The face value, coupon rate, yield, maturity and market price are given. Based on past market prices, you have calculated the return of each bond and their respective standard deviations. These values indicate the potential capital return and capital risk of buying each bond. Bond Face Value Coupon 1 8% 2 3 $100 $100 $100 11% 9% March June Maturity Yield 10 yrs 9% 20 yrs 12% 25 yrs 15% Market Price Return St. dev. 10% $93.582342 $92.530556 $56.785571 = 15% 20% 12% 10% 15% Weight 25% 1. You create a portfolio with these 3 bonds with the weights given in the table. Calculate the duration of this portfolio. 2. Calculate the return and the variance of this portfolio. The pairwise correlations are corr2=-0.5 (minus 0.5); corr3= -0.2 (minus 0.2); corr23=-0.4 (minus 0.4). NOTES: (1) Ignore coupon payments when calculating the return of the portfolio. (2) The table gives the standard deviation of each bond (st. dev.), not its variance. 3. Calculate the tracking error of portfolio A relative to the Lehman Bond Index. The return of the Lehman Bond Index and the return of portfolio A are given in the table below. Fill in the table. 25% 50% Table 1: Quarterly percentage return of portfolio and Lehman Bond Index - in decimals Quarter Portfolio A Lehman Bond Index Return | Active Return | Differences Squared 0.068 0.067666667 0.009 0.007666667 September 0.053 0.051333333 December 0.0058 0.006633333 = Variance (sum of differences squared / 3) Standard Deviation = Tracking Error
Expert Answer:
Answer rating: 100% (QA)
1 To calculate the duration of a portfolio we need to calculate the weighted average duration of the individual bonds based on their weights in the po... View the full answer
Related Book For
Posted Date:
Students also viewed these finance questions
-
If the average number of vacation days taken at DHR is 16, with a standard deviation of 5, and the average age of employee at DHR is 43, with a standard deviation of 8, which data set is more...
-
Compute profit margin for each of the 3 separate companies. Which company is the most profitable based on the profit margin ratio? Net income Net sales Total assets Kerr $ 7,280 52,000 57,000 Jax $...
-
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...
-
5.8 LAB: Structuring data using scale() and MinMaxScaler() The hmeq_small dataset contains information on 5960 home equity loans, including 7 features on the characteristics of the loan. Load the...
-
An object at a temperature of 160°C was removed from a furnace and placed in a room at 20°C. The temperature T of the object was measured each hour h and recorded in the table. A model for...
-
Suppose a right triangle is placed in a plane as shown below. The right-angle point is at (0, 0), and the other two points are at (200, 0), and (0, 100). Write a program that prompts the user to...
-
Explain in a few lines why diversifiable risk cannot be remunerated on markets in equilibrium?
-
Erica Stone works in an accounts payable department. She has attempted to convince her boss to take the discount on the 3/10 net 45 credit terms most suppliers offer, but her boss argues that giving...
-
Sales total $400,000 when variable costs total $320,000 and fixed costs total $50,000. The breakeven point in sales dollars is (Round interim calculations to two decimal places and the final answer...
-
Jack Tasker opened his Auto Repair Shop in November 2023. The balance sheet at November 30, 2023, prepared by an inexperienced part-time bookkeeper, is shown below. Required Prepare a correct balance...
-
CASE STUDY What Segway Learned About the Value of Feasibility Analysis the Hard Way Web: www.segway.com Introduction The Segway PT is a two-wheeled, self-balancing transportation device that consists...
-
Common Stockholders' Profitability Analysis A company reports the following: Net income Preferred dividends Average stockholders' equity $210,000 8,400 1,981,132 983,415 Average common stockholders'...
-
What is the Operating profit margin for Sam's appliances for the year ending 2018?
-
A portfolio has 30% of its value in IBM shares and the rest in Microsoft (MSFT). The volatility of IBM and MSFT are 25% and 33%, respectively, and the correlation between IBM and MSFT is 0.6. What is...
-
5x-6 if x3 a. Graph f(x)= x if x>3 b. Find f(1) and f(5). c. State the domain of the function.
-
a. Prepare Unique Photography's income statement for the year ended December 31, 2024. (If a box is not used in the table leave the box empty, do not select a label or enter a zero.) Unique...
-
Pharoah Corporation sold Sugar Frosted Cocoa Bombs, a children's breakfast cereal. As a promotion, Pharoah offered its customers a free music CD in exchange for 4 boxtops, plus $3.20 to cover postage...
-
Suppose that a company has 10.000 outstanding shares in the beginning of the year. On April 1st, the company increases its shares by 6.000. On July 1st, the company increases its shares again, but...
-
1. Offer three reasons why people should create advance medical directive documents. 2. What does a health care proxy achieve, and how does it differ from a living will? 3. What does a durable power...
-
1. Explain why the portions of a monthly mortgage payment that are allocated toward interest and toward principal will vary as the loan is repaid. 2. Distinguish between a conventional mortgage loan...
-
Julia has been thinking about buying a home. For several months, she has been watching real estate shows on television and visiting open houses in her community. She thinks it is time to take the...
-
Copying of the successful practices of others is called __________. (a) mimicry (b) scanning (c) grafting (d) strategy
-
The process of acquiring individuals, units, and/or firms to bring in useful knowledge to the organization is called __________. (a) grafting (b) strategy (c) scanning (d) mimicry
-
A firm which refuses to use debt in its capital structure even though it is capable of doing so will: a. Have too low of a WACC b. Incorrectly calculate prospective project NPVs as being too high c....
Study smarter with the SolutionInn App