PRACTICE PROBLEM: The following information relates to Questions 1-6 Ck ile Perreaux is a junior analyst for an international wealth management firm. Her supervis, Margit Daasvand, asks Perreaux to evaluate three fixed-income funds as part of the firm's goal fixed-income offerings. Selected financial data for the funds Aschel. Permot, and Rosaise presented in Exhibit 1. In Perreaux's initial review, she assumes that there is no reinvestment Income and that the yield curve remains unchanged. Exhibit 1. Selected Data on Fixed Income Funds Aschel Permo Rosalso Current average bood price $117.00 $91.50 59460 Expected average bond price in one year end of Year 1) $110.00 $96.00 $97.00 $ Aerage modified dushion 7.07 7.38 6.99 Average coupon payment $3.63 $6.07 36.36 Presest value of portfolio's assets (millions) $136,33 568 50 $74 38 Bond type Fixed-compon boods 9596 3995 6296 Floating-coupos bonds 29 3440 1796 Inflation-liked bonda 39 289 2144 Quality AAA 6592 159 20. BBB 356 659 50% B 0% 20% 20% Not rated 0% 0% 109 Vise of portfolio's equally (milions) 594 33 Value of borrowed funds willions) $42.00 Borrowing rate 2.809 Retom on invested finds 6.20% % After further review of the composition of each of the funds, Perreaux notes the following. Note 1 Aschel is the only fund of the three that uses leverage. Note 2 Rosalso is the only fund of the three that holds a significant number of bonds with embedded options, Daasvand asks Perreaux to analyze immunization approaches to liability-based mandates for a meeting with Villash Foundation. Villash Foundation is a tax-exempt client. Prior to the meeting Perreaux identifies what she considers to be two key features of a cash flow-matching approach Feature 1 It requires no yield curve assumptions. Feature 2 Cash flows come from coupons and liquidating bond portfolio positions. Scanned with Car Scanner Two years later, Dasvand learns that Villash Foundation needs $5,000,000 in cash to meet liabilities. She asks Perreaux to analyze two bonds for possible liquidation. Selected data on the two bonds are presented in Exhibit 2. Exhibit 2. Selected Data for Bonds 1 and 2 Bond 1 Bond 2 Current market value $5,000,000 $5,000,000 Capital gain loss 400,000 -400,000 Coupon rate 2.05% Remaining maturity 8 sears 8 years Lovestment view Overvalued Undervalued Income tax rate 39 Capital gains tax rate 30%