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1. Xpord University has 10 million rupees in its consolidated fund. Xpord has hired your investment firm to manage the above fund. You work in
1. Xpord University has 10 million rupees in its consolidated fund. Xpord has hired your investment firm to manage the above fund. You work in the bond research department of the investment firm. And suppose that the portfolio manager has asked you to evaluate several bonds for potential purchase. Issuer Maturity Bond Rating Bond Annual Frequency of Coupon Coupon Payment Rate A 5% Annual B 8% Annual 6% Annual D 9% Semi- Annual Government Corporate Corporate Corporate S 5 3 4 Market Price (Rs.) 800 870 895 930 BBB AAA BB The economic team of your investment firm has updated its economic forecasts for the next five years and those details are given below. Real risk-free rate :1% Annual average of expected inflation rate for the next 5 years: 1% AAA- Default risk premium:1% BBB-Default risk premium: 2% BB- Default risk premium: 3% AAA-Liquidity risk premium: 0.6% BBB-Liquidity risk premium :1% BB-Liquidity risk premium :1.8% Treasury Liquidity premium: 0% Maturity risk premium: 0.8 % per year The required rate of return will be calculated using following formula; Required rate of return = Real risk-free rafe + Inflation Premium + Default Risk Premium + Liquidity premium + Maturity Risk Premium The firm calculates the Inflation Premium based on following formula: Inflation Premium = (1-1) * Annual average of expected inflation Where, T-Maturity period in years The required rate of return will be calculated using following formula; Required rate of return = Real risk-free rate + Inflation Premium + Default Risk Premium + Liquidity premium + Maturity Risk Premium The firm calculates the Inflation Premium based on following formula; Inflation Premium = (T-1) * Annual average of expected inflation Where, T = Maturity period in years You can assume that the face value of bonds A, B, C and D is Rs.1000/= You are required to analyze the bonds and answer the following questions; i. The portfolio manager wants you to analyze above bonds and complete the following table (show all calculations). Further you are required to recommend witch bond/s to buy. Bond Current yield Require rate of Yield to Intrinsic value return maturity A B D ii. The portfolio manager is worried that the economy may enter a recession in 2021 with the covid -19 situation. Which bond would have the least risk in this scenario? Which bond would have the most risk? Why? The portfolio manager has asked you to identify any bonds that minimize the Reinvestment Risk. Which bond do you select? Justify your selection
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