You are managing a portfolio of $2 million. Your target duration is 13.5 years, and you choose to invest in a combination of a zero coupon bond with maturity six years and a perpetuity, each currently yielding 5%. In exactly one year, your target duration will be 12.5 years. At that time, if the yields on the zero coupon bond and the perpetuity do not change, the investment amounts in your portfolio should be: A $984,375 and $1,115,625 respectively B. $937,500 and $1,062,500 respectively C. $1,062,500 and $937,500 respectively D. $1,115,625 and $984,375 respectively E. None of the above

You are managing a portfolio of $2 million. Your target duration is 13.5 years, and you choose to invest in a combination of a zero coupon bond with maturity six years and a perpetuity, each currently yielding 5%. In exactly one year, your target duration will be 12.5 years. At that time, if the yields on the zero coupon bond and the perpetuity do not change, the investment amounts in your portfolio should be: A $984,375 and $1,115,625 respectively B. $937,500 and $1,062,500 respectively C. $1,062,500 and $937,500 respectively D. $1,115,625 and $984,375 respectively E. None of the above

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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You are managing a portfolio of $1 million. Your target duration is 10 years, and you can choose from two bonds: a zero-coupon bond with maturity five years, and a perpetuity, each currently yielding 5%. a. (Immunization) How much of each bond will you hold in your portfolio (in percentage)? b. (Rebalance) How will these fractions change next year if target duration is now nine years? D
You are managing a portfolio of $1 million. Your target duration is 10 years, and you can invest in two bonds, a zero-coupon bond with maturity of five years and a perpetuity, each currently yielding 5%.a. How much of (i) the zero-coupon bond and (ii) the perpetuity will you hold in your portfolio?b. How will these fractions change next year if target duration is now nine years?
You are managing a portfolio of $1 million. Your target duration is 10 years, and you can invest in two bonds, a zero-coupon bond with maturity of five years and a perpetuity, each currently yielding 10.0%. a. What weight of each bond will you hold to immunize your portfolio? (Round your answers to 2 decimal places.) b. How will these weights change next year if target duration is now nine years? (Round your answers to 2 decimal places.)
Consider a risky portfolio. The end-of-year cash flow derived from the portfolio will be either $75,000 or $330,000 with equal probabilities of 0.5. The alternative risk-free investment in T-bills pays 3% per year. Now suppose that you require a risk premium of 12%. What price are you willing to pay?.
You are managing a portfolio of $1.0 million. Your target duration is 18 years, and you can choose from two bonds: a zero-coupon bond with maturity five years and a perpetuity, each currently yielding 4%.Required: a. How much of (i) the zero-coupon bond and (ii) the perpetuity will you hold in your portfolio? (Do not round intermediate calculations. Round your answers to 2 decimal places.) zero-coupon __% perpetuity bond __% b. How will these fractions change next year if target duration is now seventeen years? (Do not round intermediate calculations. Round your answers to 2 decimal places.) zero-coupon __% perpetuity bond __%
You are managing a portfolio of $1.0 million. Your target duration is 16 years, and you can choose from two bonds: a zero-coupon bond with maturity five years and a perpetuity, each currently yielding 5%. Required: a. How much of (i) the zero-coupon bond and (ii) the perpetuity will you hold in your portfolio? (Do not round intermediate calculations. Round your answers to 2 decimal places.) b. How will these fractions change next year if target duration is now fifteen years? (Do not round intermediate calculations. Round your answers to 2 decimal places.)
Consider a risky portfolio. The end-of-year cash flow derived from the portfolio will be either $110,000 or $280,000 with equal probabilities of .5. The alternative risk-free investment in T-bills pays 6% per year. Now suppose that you require a risk premium of 10%. What is the price that you will be willing to pay? (Round your answer to the nearest whole dollar amount.)
You are managing a portfolio of $2 million. Your target duration is 13.5 years, and you choose to invest in a combination of a zero coupon bond with maturity six years and a perpetuity, each currently yielding 5%. The amounts of investment in the zero coupon and the perpetuity should be: $625,000 and $1,375,000 $1,375,000 and $625,000 $2,000,000 and $0 $1,000,000 and $1,000,000
Over the next three years, the expected path of 1-year interest rates 4, 1, and 1 percent. Today if you buy $1 of one-year bond and when it matures you use the money you receive to buy another one-year bond. then your expected rate of return for this $1 investment is ____% (round to the nearest integer). If the expectations theory of the term structure is true, then it implies that the current interest rat ein 2-year bond must be ____% (round to one decimal place x.x)
You are managing a portfolio of £20 million. Your target duration is 6 years, and you can choose from two bonds: a zero-coupon bond with 3 years of maturity and a perpetuity, each currently yielding 5%. Next year, the target duration is 5 years. What is the portfolio weight invested in the perpetuity?
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Suppose you purchase a 30-year, zero-coupon bond with a face value of $100 and a yield to maturity of 6%. You hold the bond for five years before selling it. If the bond’s yield to maturity is 6% when you sell it, what is the internal rate of return of your investment?

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