Question 4.20 Marks) (A) An investor has the following bond portfolio: Face Value Semi Annual Coupon (%pa) Matuirty year) Semi Annual Yield (pa) Bond A $60,000,000 8.00 12 9.80% Bond B $45,000,000 11.00 8 9.20% Bond $75,000,000 9.00 6 8.20% What is the portfolio Macaulay duration? (4 Marks) (1) The interest rate outlook expects to increase so the investor decides to reduce the portfolio to a target Macaulay duration of 2. The investor decides to keep the weighting on Bond C, how much Bond A and Bond B do the investor need to change" in order to meet the target? (7 Marks) (iii) Instead of (11), the investor has a choice to replace Bond A by the following three bonds issued by the same issuer to increase portfolio duration, Credit Rating Semi Annual Coupon (pa) Maturty (year) Semi Annual Yield (pa) Annual Duration Bond X AAA 8 20 8.00 10.26 Bond Y AA 8 20 8.00% 10.26 Bond 2 OCC 8 20 8.00% 10.26 Explain which of these 3 bonds will the investor choose to have the best impact on interest rate decrease? (3 Marks) (B) The diagram below shows the impact of Credit Ratings on Bond Yields Spread BBB 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 "AA" and "A" rating, while a widening yield between "AA" and "BB" rating, though the yields for "A" rated bonds remain constant. In anticipation of such move, the investor will adjust the weighting of these bonds. Which would he "overweight", "underweight" and "neutral" based the expectation? (6 Marks) Question 4.20 Marks) (A) An investor has the following bond portfolio: Face Value Semi Annual Coupon (%pa) Matuirty year) Semi Annual Yield (pa) Bond A $60,000,000 8.00 12 9.80% Bond B $45,000,000 11.00 8 9.20% Bond $75,000,000 9.00 6 8.20% What is the portfolio Macaulay duration? (4 Marks) (1) The interest rate outlook expects to increase so the investor decides to reduce the portfolio to a target Macaulay duration of 2. The investor decides to keep the weighting on Bond C, how much Bond A and Bond B do the investor need to change" in order to meet the target? (7 Marks) (iii) Instead of (11), the investor has a choice to replace Bond A by the following three bonds issued by the same issuer to increase portfolio duration, Credit Rating Semi Annual Coupon (pa) Maturty (year) Semi Annual Yield (pa) Annual Duration Bond X AAA 8 20 8.00 10.26 Bond Y AA 8 20 8.00% 10.26 Bond 2 OCC 8 20 8.00% 10.26 Explain which of these 3 bonds will the investor choose to have the best impact on interest rate decrease? (3 Marks) (B) The diagram below shows the impact of Credit Ratings on Bond Yields Spread BBB 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 "AA" and "A" rating, while a widening yield between "AA" and "BB" rating, though the yields for "A" rated bonds remain constant. In anticipation of such move, the investor will adjust the weighting of these bonds. Which would he "overweight", "underweight" and "neutral" based the expectation? (6 Marks)