b) Scenario 2: Short-selling is not permitted. The short term interest rates decrease and long term interest rates increase. Your investment horizon is 4.5 years. Construct a portfolio using two bonds from the above table that would be best for reinvestment risk and interest rate risk for this specific yield curve shift. Explain your rationale, type of bond portfolio constructed and classical immunisation strategy immunising (12 marks) The following four bonds are available to you Bond 102 6% 4.4 years 5 years 5% 10 105 7% 9.9 years 14.5 years 5% 13 100 Price Coupon Modif. Duration Maturity Yield Price Value of a Basis6 Point 2% 0.9 years 1.1 years 35% 0 4.6 years 5.4 years 0 Scenario 1 : Current interest rates are 4% and you expect them to rise. Which bond(s) would you consider buying? a) Scenario 3: You are allowed to short-sell and there is no need for immunisation of portfolio. Which bond trading strategy would you apply to best exploit the shift in the yield curve described in scenario 2? lllustrate how would you apply that strategy using bonds in the table above if you had E2M2 c) b) Scenario 2: Short-selling is not permitted. The short term interest rates decrease and long term interest rates increase. Your investment horizon is 4.5 years. Construct a portfolio using two bonds from the above table that would be best for reinvestment risk and interest rate risk for this specific yield curve shift. Explain your rationale, type of bond portfolio constructed and classical immunisation strategy immunising (12 marks) The following four bonds are available to you Bond 102 6% 4.4 years 5 years 5% 10 105 7% 9.9 years 14.5 years 5% 13 100 Price Coupon Modif. Duration Maturity Yield Price Value of a Basis6 Point 2% 0.9 years 1.1 years 35% 0 4.6 years 5.4 years 0 Scenario 1 : Current interest rates are 4% and you expect them to rise. Which bond(s) would you consider buying? a) Scenario 3: You are allowed to short-sell and there is no need for immunisation of portfolio. Which bond trading strategy would you apply to best exploit the shift in the yield curve described in scenario 2? lllustrate how would you apply that strategy using bonds in the table above if you had E2M2 c)