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You are an Investment Analyst at MA INC. On 05/01/2020 a new client has tasked you with investing $100m in the following two US corporate
You are an Investment Analyst at MA INC. On 05/01/2020 a new client has tasked you with investing $100m in the following two US corporate bonds equally: AMDL Bond LCFR Bond Coupon Par T (years) i 12% $1,000 8% $1,000 3 14% 10% Your client instructs you that they wish to benefit from changes in the yield to maturity and insists that you actively manage the portfolio moving funds on a daily basis. On the 07/01/2020 the Federal Reserve announces an imminent increase in the Federal Funds rate by 2%. Your analysis indicates that the respective yield to maturities on AMDL and LCFR bonds will rise by 50% and 100% of the announced increase in the Federal Funds rate. Required: a) Compute the Price, Duration, Modified Duration and Convexity factor of AMDL and LCFR bonds using the information in the table above. b) Calculate the Duration and Modified Duration of an equally weighted portfolio consisting of AMDL and LCFR bonds. c) Accounting for convexity, produce forecasts of the respective price changes in each individual bond and compute the assumed portfolio value at the end of trading on 07/01/2020. Hint: In order to compute the portfolio value after the Federal Funds rate increase, you need to first calculate the number of bonds initially bought on 05/01/2020. You may round this to the nearest whole number. d) Comment on the relationship between bond prices and yield to maturity with reference to the amount of estimation error within bond price forecasts when not accounting for convexity
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