Question 2a: Bonds & Shares As a securities trader for Monash Investments, you are required to build a $10 million portfolio of bonds, approximately consisting of 40% zero-coupon and 60% coupon BHP bonds. You require a 4.5% p.a. yield-to-maturity on BHP zero-coupons that have a 4 year maturity and face value of $100,000. You require a 7.5% p.a. yield-to-maturity on BHP coupon bonds that have a 6 year maturity, a face value of $1,000,000 and are paying a coupon rate of 6.5% p.a., semi-annually.

To construct the portfolio, you will purchase

a. 47

b. 47.7

c. 48

d. 49

zero-coupon bonds,

a. 6.2

b. 7

c. 5

d. 6

coupon bonds with

a. 17,313.83

b. 117,313.83

c. 0

d. 344,442.50

Question 2b: Bonds & Shares After 2 years, commodity prices have risen, pushing down the risk of BHP. This decreases the YTM buyers in the market require on it's zero-coupons to 3% p.a. and 6% p.a. for it's coupon bonds.

Selling your holdings of BHP bonds will result in a total profit/loss of

a. -848,962.46

b. 848,962.46

c. -488,962.46

d. 282,962.46

e. -282,962.46

f. 488,962.46

for the zero-coupons and

a. 312,308.62

b. -390,976.20

c. -312,308.62

d. -412,308.62

e. 412,308.62

f. 390,976.20