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You are a Fixed Income Portfolio Manager and has been approached by a potential investor who is new to the bond market. The potential investor

You are a Fixed Income Portfolio Manager and has been approached by a potential investor who is new to the bond market. The potential investor has raised some queries and would like your assistance on the following item as per below:
a) What are the three main characteristics a fixed income investor should be aware when investing in a bond instrument. The potential investor would like to buy Bond X described in the exhibit below, for settlement on 16 June 2020.
Annual Coupon 5%
Coupon Payment Frequency Semi-annual
Interest Payment Dates 10 April and 10 October
Maturity Date 10 October 2022
Day Count Convention 30/360
Annual Yield-to-Maturity 4%
a) What is the price that Bond X settled on 16 June 2020 is closest to?
Assume that the 6.75% US Treasury bond that matures on 15 August 2041 is priced to yield 8.14% for settlement on 15 October 2020. Coupons are paid semi-annually on 15 February and 15 August. The yield-to-maturity is stated on a street-convention semi-annual bond basis. This settlement date is 61 days into a 184-day coupon period, using the actual/actual day-count convention. Compute the following for this Treasury bond assuming a 100 bps change in the yield-to-maturity and investment of USD1M.
b) approximate modified duration;
c) the approximate Convexity;
d) Assuming the approximate effective duration is 5.907 and approximate convexity of 87.157. Calculate the estimated convexity adjusted percentage price change resulting from a 100 basis points decrease in yield to maturity.
e) Bonds often have embedded optionality with different exercise styles. Distinguish between an American-Style Call, European-Style Call and Bermuda-Style Call bonds and impact of the stated optionality on the yields of the bonds.
f) Critically assess the key risks to which a bond investment is exposed to?
g) Differentiate between a passive bond investment strategy to an active bond investment strategy.
h) Critically outline the main sources of profit for an active bond management strategy. Support your response with relevant examples.
i) Outline the two components of interest rate risks for a coupon paying bond.
j) Differentiate between clean price, dirty price and full price
k) For a bond under what conditionals an investors rate of return on a bond investment to equal the bonds YTM?
l) Assume that the thereare two non-callable fixed-coupon bonds on the same date with the same coupon rate except that one matures in 5 years and the other matures in 15 years. Critically explain the impact on each of the bond for a 0.5% change in interest rate.

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