You are provided with the information in Tables 4.1 and 4.2 on a US bond fund and its benchmark US bond index. Table 4.1 Average* credit rating Average* yield to maturity Fund A 2.43% Benchmark AA- 1.92% *Average of holdings in Fund, or Benchmark constituents Table 4.2 Fund Benchmark Key rate duration 6 months 1 year 2 years 3 years 5 years 7 years 10 years 15 years 20 years 0.1 0.2 0.4 0.4 0.9 1.4 1.9 2.7 3.2 0.1 0.3 0.4 0.4 0.7 0.8 1.0 1.7 1.9 (a) Calculate the modified duration of the Fund and the benchmark index. (5 marks) (b) Based your answer to question (a) and the information provided in Table 4.2 explain what is likely to be the Fund manager's forecast for movements in the US yield curve. (30 marks) (c) Suggest two reasons why the average yield to maturity of bonds in the Fund is higher than the benchmark's average yield to maturity. (20 marks) (d) Is the Fund manager expecting yield spreads between high and low credit-rated bonds to widen or narrow? Explain your answer. (15 marks) (e) Explain three reasons why there might be a change in yield spreads between high and low credit-rated bonds. (15 marks) (f) Identify three reasons why managing a bond index tracking fund is more challenging than managing an equity index fund. (15 marks) You are provided with the information in Tables 4.1 and 4.2 on a US bond fund and its benchmark US bond index. Table 4.1 Average* credit rating Average* yield to maturity Fund A 2.43% Benchmark AA- 1.92% *Average of holdings in Fund, or Benchmark constituents Table 4.2 Fund Benchmark Key rate duration 6 months 1 year 2 years 3 years 5 years 7 years 10 years 15 years 20 years 0.1 0.2 0.4 0.4 0.9 1.4 1.9 2.7 3.2 0.1 0.3 0.4 0.4 0.7 0.8 1.0 1.7 1.9 (a) Calculate the modified duration of the Fund and the benchmark index. (5 marks) (b) Based your answer to question (a) and the information provided in Table 4.2 explain what is likely to be the Fund manager's forecast for movements in the US yield curve. (30 marks) (c) Suggest two reasons why the average yield to maturity of bonds in the Fund is higher than the benchmark's average yield to maturity. (20 marks) (d) Is the Fund manager expecting yield spreads between high and low credit-rated bonds to widen or narrow? Explain your answer. (15 marks) (e) Explain three reasons why there might be a change in yield spreads between high and low credit-rated bonds. (15 marks) (f) Identify three reasons why managing a bond index tracking fund is more challenging than managing an equity index fund. (15 marks)