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