InvestmentCorporation of Dubai (ICD) is the premier sovereign wealth fund serving the Emirate of Dubai. ICD is led by a prominent group of leaders including H.E. the Crown Prince of Dubai and several Ministers.

You are a portfolio manager who invests in fixed income securities for ICD. For the financial year 2021-2022, you are to complete important tasks set forth by the Board. They are enumerated as follows:

Task 1: In a recent meeting of the Board, it was discussed that the economic conditions would be dire for the financial year 2021-2022 given COVID 19 pandemic. The senior economist at the ICT predicts that the interest rates will remain low and could decrease further as the government of the UAE and the Central Bank of the UAE increase the money supply to deal with post-covid19 economic conditions. You are advised to study all possible types of Yield Curves and predict future economic conditions for the UAE based on them. Elaborate your thinking on this issue - logically argue your position (critical thinking) and make a recommendation.

Task 2: The Board is considering investing in a special issue of zero-coupon bonds with 20-year maturity. These Zero Coupons are issued through UK Treasury in British Pounds. The par value of these bonds are 1000. Current yield in British capital markets is 6.80% per annum. The Board wants you to find the fair price of these Zero-coupon bonds so that ICD can allocate funds for that long-term investment.

Task 3: An analyst who has been scoping for arbitrage opportunities in dollar-denominated Eurobonds have uncovered the following scenarios:

• The yield on a regular bond is 7% and the yield on a callable bond is6%
• The yield on a regular bond is 7% and the yield on a puttable bond is 8%

You as the portfolio managers to identify the arbitrage opportunity and advise the Board on which investment to make. You have to provide your logic in your decision making process (critical thinking). Will you recommend a regular bond, callable bond or the puttable bond? Why?

Task 4: ICD has invested in convertible bonds in its portfolio. ICD invested in these convertible bonds exactly one year back and now has to make an evaluation of the investment. The bond par value is AED 1000 and yields a 7% annual interest rate. The convertible bond can be converted into 10 shares of the company stock listed in the Dubai Financial Market(DFM). Current the stock price is AED 127.50. As the portfolio manager for fixed income securities, how would you advise the Board? Logically present your case (critical thinking)

Task 5:

ICD is considering investing in a 3-year fixed-rate investment-grade corporate bond with a coupon rate of 6% but coupon paid semi-annually. The current market rate (current yield) is 7%. The Board wants you to calculate the fair value of this bond which pays interest semiannually (in this case, the bond will make 6 semi-annual payments). The par value is AED1000. Show your calculations. Given the post-covid19 economy, will you recommend investing in this bond? Your answer should take into consideration governments post-covid19 policies with regard to money supply and interest rates.

Task6:

ICD has invested in a fixed rate bond that has a coupon rate of 10%. The maturity of the bond is 5 years and the par value is AED 1000. The board wants you to calculate the duration of this bond if market rates are 8%. (5 marks)

Task7:

ICD has a substantial investment in the bond investment in Task 6. The Board wants to know the change in the value of the bond (and the bond portfolio) when the interest rates change from 10% to 8%. Using the duration method, advise the Board on the impact of an interest rate change on the bond (and bond portfolio). ICD had invested AED 75 million in these bonds.

Task8:

ICD wants a better estimation for Task 7. They have advised you to use modified duration and convexity methods to come up with a better estimation of the impact of the interest rate change. Show your calculations. Advise the Board on the impact of the interest rate sensitivity on the bond portfolio.