Question 4 (20 Marks) (A) An investor has the following bond portfolio Face Value Coupon Maturity Yield (s.a.) Market Value Annual Duration Bond A $50 Million 8% 12 yrs 9.62% $44,306,787 7.652 Bond B $25 Million 11% 8 yrs 9.38% $27 243,887 5.633 Bond C $25 Million 9% 6 yrs 9.10% $24.885,343 4.761 What is the portfolio Macaulay duration? (4 Marks) (i) The interest rate outlook expects to increase so the investor decides to reduce the portfolio to a target Macaulay duration of 4. The investor decides to keep the weighting on Bond Chow much Bond A and Bond B does the investors need to adjust in order to meet the target (7 Marks) (ii) Instead of (ii) lowering Bond A's weighting the investor has a choice to replace Bond A by the following three bonds issued by the same ser Credit Rating Coupon Maturity Annual Yield Annual Duration Bond AAA 10 6 years 9.70% Bondy AA 10% 6years 9.70% Bond z C 10% 6years 9.70% Which one will be choose to have the best impact on interest rate increase protection Marks) (B) The diagram below shows the impact of Credit Ratings on Bond Yields BBB Spread over Treasures A AA AAA Maturity A bond investor has a portfolio of AA, A, BBB and BB corporate bonds from the same sector. The investor expects a declining yield spread between bonds with an "AA" and an "A" rating, while a widening yield between bonds with an "AA" and an "BB" rating, though the yields for "BB" rated bonds remain constant. In anticipation of such move, the investor will adjust the weighing of these bonds. Which would he overweight", "underweight and heutral" hased the expectation? (6 Marks) -End of Paper Question 4 (20 Marks) (A) An investor has the following bond portfolio Face Value Coupon Maturity Yield (s.a.) Market Value Annual Duration Bond A $50 Million 8% 12 yrs 9.62% $44,306,787 7.652 Bond B $25 Million 11% 8 yrs 9.38% $27 243,887 5.633 Bond C $25 Million 9% 6 yrs 9.10% $24.885,343 4.761 What is the portfolio Macaulay duration? (4 Marks) (i) The interest rate outlook expects to increase so the investor decides to reduce the portfolio to a target Macaulay duration of 4. The investor decides to keep the weighting on Bond Chow much Bond A and Bond B does the investors need to adjust in order to meet the target (7 Marks) (ii) Instead of (ii) lowering Bond A's weighting the investor has a choice to replace Bond A by the following three bonds issued by the same ser Credit Rating Coupon Maturity Annual Yield Annual Duration Bond AAA 10 6 years 9.70% Bondy AA 10% 6years 9.70% Bond z C 10% 6years 9.70% Which one will be choose to have the best impact on interest rate increase protection Marks) (B) The diagram below shows the impact of Credit Ratings on Bond Yields BBB Spread over Treasures A AA AAA Maturity A bond investor has a portfolio of AA, A, BBB and BB corporate bonds from the same sector. The investor expects a declining yield spread between bonds with an "AA" and an "A" rating, while a widening yield between bonds with an "AA" and an "BB" rating, though the yields for "BB" rated bonds remain constant. In anticipation of such move, the investor will adjust the weighing of these bonds. Which would he overweight", "underweight and heutral" hased the expectation? (6 Marks) -End of Paper
