Question
Kenya Commercial Bank aspires to invest 30 million shillings and is willing to accept 11% rate of return over a 5 year period when there
Kenya Commercial Bank aspires to invest 30 million shillings and is willing to accept 11% rate of return over a 5 year period when there is a possibility of immunized rate of return of 14%. This safety cushion can be used for active portfolio management; REQUIRED: (a) If the Bank invests all the funds (30 million shillings) in a 15 year, 14% Coupon Bond selling at par (100 shillings) and after 2 years the market yield dropped by 2%; (i) Calculate the value of the portfolio at the end of 2 years. (ii) Compute the required investment after the drop in market yield. (iii) Compute the amount of safety cushion the Bank has. (b) If the market increases by 2%, enumerate on the success of this active portfolio management strategy and whether the Bank should continue with this strategy.
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