Answered step by step
Verified Expert Solution
Question
1 Approved Answer
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
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 Key rate Fund Benchmark duration 6 months 0.1 0.1 1 year 0.2 0.3 2 years 0.4 0.4 years 0.4 0.4 5 years 0.9 0.7 7 years 1.4 10 years 1.9 1.0 15 years 2.7 1.7 20 years 3.2 1.9 0.8 (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. (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 Key rate Fund Benchmark duration 6 months 0.1 0.1 1 year 0.2 0.3 2 years 0.4 0.4 years 0.4 0.4 5 years 0.9 0.7 7 years 1.4 10 years 1.9 1.0 15 years 2.7 1.7 20 years 3.2 1.9 0.8 (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. (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)
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started