Question 1 Anthony Garcia is a Risk Manager in the investment division of a global corporation and is considering the purchase of Government bonds in his home country. Garcia decides to evaluate four strategies for implementing his investment in the government bonds. Table A below gives the details of the four strategies and Table B contains the assumptions that apply to all strategy options. Prior to choosing one of the four investment strategies, Garcia asks you, the Assistant Manager of the investment portfolio, to analyze how the market value of the bonds will change if an instantaneous interest rate shift occurs immediately after the funds from the portfolio are invested in the bonds. The details of the interest rate shift are given in Table C. Using supporting calculations write a brief report advising him which strategy he should undertake and why. Include in your report the current yield to maturity for each of the four bonds. Table A Modified Duration 4.878 9.6432 Strategy 5 Year Maturity 10 Year Maturity 15 Year Maturity 20 Year Maturity Modified Duration= Modified Duration= 14.3816 Modified Duration= 19.0476 1 20 Million 2 10 Million 10 Million 3 15 Million 5 Million Table B Market Value of Bonds 20 million Bond Maturities Bond Coupon Rates Table C 20 years OR 5 and 15 years OR 10 and 20 years 0.00% (Zero Coupon) Maturity 5 Year Maturity 10 Year Maturity Interest Rate Change Up 50 bp down 75 bp 15 Year Maturity down 10 bp 20 Year Maturity Up 25 bp (15 Marks)