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Read the following case study and answer the questions below: Mr. Kabir is serving as a fund manager in FourSeason Pvt. Ltd. The top management
Read the following case study and answer the questions below: Mr. Kabir is serving as a fund manager in FourSeason Pvt. Ltd. The top management of the firm is planning to invest a big portion of the fund in the fixed income securities, particularly bonds. Accordingly, Mr. Kabir has been asked to select suitable bond(s) for investing the firm's fund. Currently, he is considering three bonds, namely Alpha, Beta and Gamma. The necessary information regarding the bonds are as follows: The bonds pay interest semi-annually while they are of equal risk. Mr Kabir estimates that he requires a rate of return of 7% from the investment. 3. a) Calculate the convexity measure and dollar convexity measure for Alpha, Beta and Gamma. (show all the necessary calculations) 30 marks b) Based on the convexity measure calculated in 3(a), which bond should Mr Kabir select for investment? Provide explanation of your answer. 10 marks
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