Ann Smith works for a US investment firm in its London office. She manages the firm’s British pound–denominated corporate bond portfolio. Her department head in New York City has asked Smith to make a presentation on next year’s total expected return of her portfolio in US dollars and the components of this return. Exhibit 11 shows information on the portfolio and Smith’s expectations for the next year. Expected return (for the bond portfolio) and its components are on an annualized basis, and any potential coupons are assumed to be paid annually. Calculate the total expected return of Smith’s bond portfolio, assuming no reinvestment income.

Transcribed Image Text:

EXHIBIT 11 Portfolio Characteristics and Expectations Notional principal of portfolio (in millions) Average bond coupon payment (per £100 par value) Coupon frequency Investment horizon Current average bond price Expected average bond price in one year (assuming an unchanged yield curve) Average bond convexity in one year Average bond modified duration in one year Expected average benchmark yield-to-maturity change Expected change in spread (spread expected to narrow in this scenario) Expected currency losses (£ depreciation versus US$) £100 £2.75 Annual 1 year £97.12 £97.27 18 3.70 0.26% -0.10% 0.50%