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Need further explanations and full steps. Thanks. (A) An investor has the following bond portfolio: Semi Annual Coupon Face Value pa) Bond A US$2,000,000 10
Need further explanations and full steps. Thanks.
(A) An investor has the following bond portfolio: Semi Annual Coupon Face Value pa) Bond A US$2,000,000 10 Bond B US$4,500,000 3 Bond C US$3,500,000 6.5 Bond D US$7,000,000 0 US$17,000,000 Maturity (Yrs) 6 5 1 12 Semi Annual Yield (pa) 7.4 6.6 8 5 (1) What is the portfolio Macaulay duration? (4 Marks) (11) The interest rate outlook expects to increase so the investor decides to reduce the portfolio to a target Macaulay duration of 3. The investor decides to keep the weighting on Bond C and Bond A, how much Bond B and Bond D do the investor need to "change" in order to meet the target? (7 Marks) (111) Instead of (1), the investor has a choice to keep all the bond portfolio and only to replace Bond A by one of the following three bonds issued by the same issuer to decrease portfolio duration. Annual Credit Semi Annual Coupon Maturity Semi Annual Yield Maculary Rating (pa) (Yrs) pa) Duration Bond X AA 10 4.5 3 Bond Y AAA 10 6 4.5 3 Bond z 10 6 4.5 3 6 Explain which of these 3 bonds will the investor choose to have the best protective impact on interest rate increaseStep by Step Solution
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