Case Problem 11.2 Grace Decides to Immunize Her Portfolio

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Grace Hesketh is the owner of an extremely successful dress boutique in downtown Chicago. Although high fashion is Graces first love, shes also interested in investments, particularly bonds and other fixed-income securities. She actively manages her own investments and over time has built up a substantial portfolio of securities. Shes well versed on the latest investment techniques and is not afraid to apply those procedures to her own investments.

Grace has been playing with the idea of trying to immunize a big chunk of her bond portfolio. Shed like to cash out this part of her portfolio in seven years and use the proceeds to buy a vacation home in her home state of Oregon. To do this, she intends to use the $200,000 she now has invested in the following four corporate bonds (she currently has $50,000 invested in each one).

A 12-year, 7.5% bond thats currently priced at $895

A 10-year, zero-coupon bond priced at $405

A 10-year, 10% bond priced at $1,080

A 15-year, 9.25% bond priced at $980

(Note: These are all noncallable, investment-grade, nonconvertible/straight bonds.)

Questions

Given the information provided, find the current yield and the promised yield for each bond in the portfolio. (Use annual compounding.)