QUESTION 3 (35 MARKS) Roxy is interested in bonds and other fixed-income securities. She actively manages her own investments and over time has built up a substantial portfolio of securities. She has been playing with the idea of trying to immunize a big chunk of her bond portfolio. She would like to cash out this part of her portfolio in seven years and use the proceeds to buy a vacation home in her home state of Malacca. To do this, she intends to use the RM200,000 she now has invested in the following four corporate bonds (she currently has RM50,000 invested in each one). Bond Years to Maturity Coupon Rate Bond Value A 12 7.50% RM895.00 B 10 Nil RM405.00 10 10.00% RM1,080.00 15 9.25% RM980.00 (Note: These are all noncallable, investment-grade, nonconvertible/straight bonds.) Questions a) Given the information provided, find the current yield and the promised yield for each bond in the portfolio. (Use annual compounding.) (8 marks) b) Calculate the Macaulay and modified durations of each bond in the portfolio and indicate how the price of each bond would change if interest rates were to rise by 75 basis points. Explain the impact of the price change if interest rates were to fall by 75 basis points. (12 marks) c) Find the duration of the current four-bond portfolio. Justify whether the seven- year target that Roxy has set, would be considered as an immunized portfolio. (5 marks) d) e) Discuss on how Roxy could lengthen or shorten the duration of this portfolio. Decided on the shortest and longest portfolio duration she can achieve. (5 marks) Using one or more of the four bonds, put together a RM200,000 immunized portfolio for Roxy. As this portfolio will now be immunized, explain whether Roxy will be able to treat it as a buy and hold portfolio-one she can put away and forget about it (5 marks) QUESTION 3 (35 MARKS) Roxy is interested in bonds and other fixed-income securities. She actively manages her own investments and over time has built up a substantial portfolio of securities. She has been playing with the idea of trying to immunize a big chunk of her bond portfolio. She would like to cash out this part of her portfolio in seven years and use the proceeds to buy a vacation home in her home state of Malacca. To do this, she intends to use the RM200,000 she now has invested in the following four corporate bonds (she currently has RM50,000 invested in each one). Bond Years to Maturity Coupon Rate Bond Value A 12 7.50% RM895.00 B 10 Nil RM405.00 10 10.00% RM1,080.00 15 9.25% RM980.00 (Note: These are all noncallable, investment-grade, nonconvertible/straight bonds.) Questions a) Given the information provided, find the current yield and the promised yield for each bond in the portfolio. (Use annual compounding.) (8 marks) b) Calculate the Macaulay and modified durations of each bond in the portfolio and indicate how the price of each bond would change if interest rates were to rise by 75 basis points. Explain the impact of the price change if interest rates were to fall by 75 basis points. (12 marks) c) Find the duration of the current four-bond portfolio. Justify whether the seven- year target that Roxy has set, would be considered as an immunized portfolio. (5 marks) d) e) Discuss on how Roxy could lengthen or shorten the duration of this portfolio. Decided on the shortest and longest portfolio duration she can achieve. (5 marks) Using one or more of the four bonds, put together a RM200,000 immunized portfolio for Roxy. As this portfolio will now be immunized, explain whether Roxy will be able to treat it as a buy and hold portfolio-one she can put away and forget about it
