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You are an Investment Analyst at MAVIC INC. On 10/01/2022 a new client has tasked you with investing $450m in the following three US corporate
You are an Investment Analyst at MAVIC INC. On 10/01/2022 a new client has tasked you with investing $450m in the following three US corporate bonds holding $250m in AMB, $150m in BMC and $50m in COD: BMC Bond Coupon Par T (years) i Moody's Rating AMB Bond 6% $1,000 3 10% Aa1 COD Bond 11% $1,000 3 10% Aa1 8% $1,000 5 14% Ba1 Your client instructs you to monitor the value of their portfolio on a daily basis and provide them with updates on how you expect the value of the portfolio to change in light of any changes to interest rates that pass through into the yield to maturity of each bond. On the 11/01/2022 the Federal Reserve announces an increase in the Federal Funds rate by 2%. Your analysis indicates that the respective yield to maturities on AMB and BMC bonds will rise by the same amount as the Federal Funds Rate, and that the yield to maturity on COD bond will rise by 1.5 times the rise in the Federal Funds rate. Required: a) Compute the Price, Duration, Modified Duration and Convexity factor of each bonds using the information in the table above. [45 marks) b) Using relevant methods, produce forecasts of each bond price change in order to anticipate what the portfolio value will be after the rise in the Federal Funds rate. Justify your choice of method in the context of the above scenario. [45 marks] c) Compute the Portfolio Duration and Modified Duration and provide a brief comment on what Duration is. [10 marks]
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