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Bond Math and Portfolios A manager is considering two portfolios: a bullet portfolio and a barbell portfolio. Portfolio A Par Maturity Coupon YTM $9,550,000 5/1/19
Bond Math and Portfolios | |||
A manager is considering two portfolios: a bullet portfolio and a barbell portfolio. | |||
Portfolio A | |||
Par | Maturity | Coupon | YTM |
$9,550,000 | 5/1/19 | 4.20% | 4.47% |
$9,450,000 | 5/1/19 | 4.75% | 4.57% |
$20,325,000 | 5/1/27 | 6.15% | 6.65% |
Portfolio B | |||
$19,050,000 | 11/1/22 | 5.75% | 5.76% |
$19,400,000 | 11/1/22 | 5.95% | 5.80% |
(a) Which portfolio is the bullet portfolio? | |||
(b) What are the current prices of the bonds in both portfolios? Use 5/1/17 as the settlement date. | |||
(c) What are the modified durations of the bonds in both portfolio? | |||
(d) What are the durations of both portfolios? | |||
(e) What is the cash yield of each portfolio? | |||
Consider the following scenarios over a one year period (consider settlement is 5/1/18). | |||
CASE IPARALLEL SHIFT IN RATES OF +2.00% PER ANNUM | |||
Assume the yield to maturity on each bond increases by 2.00% | |||
CASE IISTEEPENING OF YIELD CURVE | |||
Assume the yield on the two short bonds in Portfolio A decreases by 2.00%, the yield on | |||
the long bond its unchanged and the yields on the bonds in Portfolio B decrease by 1.00%. | |||
CASE IIIFLATTENING OF YIELD CURVE | |||
Assume the yield on the two short bonds in Portfolio A its unchanged, the yield on | |||
the long bond decreases by 2.00% and the yield on the bonds in Portfolio B decrease by 1.00%. | |||
(e) Calculate the bond prices as of 5/1/18 based on each of the scenarios noted above. | |||
(f) What is the total return of each portfolio expressed as a bond-equivalent yield for each scenario assuming | |||
coupon payments are reinvested at 1.00% per annum, semi-annual compounding. |
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