A manager is holding a bond portfolio worth $10 million with a modified duration of 5 years. She would like to hedgethe risk of the portfolio by short-selling Treasury bonds. The modified duration of T-bonds is 6 years. How manydollars' worth of T-bonds should she sell to minimize the variance of her position? (Enter your answer in dollars notmillions rounded to the nearest dollar value.)Answer is complete but not entirely correct.$Dollars' worth of T-bonds to be sold8 X

Duration of bond is the weighted period required to recover cash flow from the bond and it shows the…

A manager is holding a bond portfolio worth $10 million with a modified duration of 5 years. She would he risk of the portfolio by short-selling Treasury bonds. The modified duration of T-bonds is 6 years. He Hollars' worth of T-bonds should she sell to minimize the variance of her position? (Enter your answer millions rounded to the nearest dollar value.) Answer is complete but not entirely correct. $ Dollars' worth of T-bonds to be sold 8

A manager is holding a bond portfolio worth $10 million with a modified duration of 5 years. She would he risk of the portfolio by short-selling Treasury bonds. The modified duration of T-bonds is 6 years. He Hollars' worth of T-bonds should she sell to minimize the variance of her position? (Enter your answer millions rounded to the nearest dollar value.) Answer is complete but not entirely correct. $ Dollars' worth of T-bonds to be sold 8

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter6: Risk And Return

Section: Chapter Questions

Problem 5MC: Your client has decided that the risk of the bond portfolio is acceptable and wishes to leave it as...

See similar textbooks

Similar questions

A manager is holding a $1 million bond portfolio with a modified duration of 8 years. She would like to hedge the risk of the portfolio by short-selling Treasury bonds. The modified duration of T-bonds is 10 years. How many dollars’ worth of T-bonds should she sell to minimize the variance of her position?
Your client has decided that the risk of the bond portfolio is acceptable and wishes to leave it as it is. Now your client has asked you to use historical returns to estimate the standard deviation of Blandy’s stock returns. (Note: Many analysts use 4 to 5 years of monthly returns to estimate risk, and many use 52 weeks of weekly returns; some even use a year or less of daily returns. For the sake of simplicity, use Blandy’s 10 annual returns.)
An investor has $826,000 to invest in bonds. Bond A yields an average of 5% and the bond B yields 6%. The investor requires that at least 3 times as much money be invested in bond A as in bond B. You must invest in these bonds to maximize his return. This can be set up as a linear programming problem. Introduce the decision variables: x = dollars invested in bond A y = dollars invested in bond B Compute x + y. $. Round to the nearest cent.
Ms. B has $1000 to invest. She is considering investing in the common stock of company M. In addition, Ms. B will either borrow or lend at the risk-free rate. Ms. B decide to invest $350 in common stock of company M and $650 placed in the risk- free asset. The relevant parameters are 1) What is the expected return? 2) What is the variance of the portfolio? 3) What is the standard deviation of the portfolio?
An investor has $633,000 to invest in bonds. Bond A yields an average of 8% and the bond B yields 5%. The investor requires that at least 3 times as much money be invested in bond A as in bond B. You must invest in these bonds to maximize his return. This can be set up as a linear programming problem. Introduce the decision variables: ?=dollars invested in bond A ?=dollars invested in bond B Compute ?+? $ ________. Round to the nearest cent.
Imagine you are a provider of portfolio insurance. You are establishing a 4-year program. The portfolio you manage is currently worth $102 million, and you hope to provide a minimum return of 0%. The equity portfolio has a standard deviation of 20% per year, and T-bills pay 6% per year. Assume for simplicity that the portfolio pays no dividends (or that all dividends are reinvested). a-1. How much should be placed in bills? (Enter your answer in millions rounded to 2 decimal places.) a-2. How much in equity? (Enter your answer in millions rounded to 2 decimal places.) b-1. What is the delta if the new portfolio falls by 7% on the first day of trading? (Negative value should be indicated by a minus sign.Round your answer to 4 decimal places.) b-2. Complete the following: Assuming the portfolio does fall by 7%, the manager should sell ___ in stock
ABC Co. has a large amount of variable rate financing due in one year. The management is concerned about the possibility of increases in short-term rates. Which would be an effective way of hedging this risk?a. Buy Treasury notes in the futures market.b. Sell Treasury notes in the futures market.c. Buy an option to purchase Treasury bonds.d. Sell an option to purchase Treasury bonds
Imagine you are a provider of portfolio insurance. You are establishing a four-year program. The portfolio you manage is currently worth $210 million, and you promise to provide a minimum return of 0%. The equity portfolio has a standard deviation of 25% per year, and T-bills pay 7% per year. Assume for simplicity that the portfolio pays no dividends (or that all dividends are reinvested). a-1. What percentage of the portfolio should be placed in bills? (Input the value as a positive value. Round your answer to 2 decimal places.) Portfolio in bills % a-2. What percentage of the portfolio should be placed in equity? (Input the value as a positive value. Round your answer to 2 decimal places.) Portfolio in equity %
You are a provider of portfolio insurance and are establishing a four-year program. The portfolio you manage is currently worth $70 million, and you promise to provide a minimum return of 0%. The equity portfolio has a standard deviation of 25% per year, and T-bills pay 6.2% per year. Assume that the portfolio pays no dividends. Required: a-1. How much of the portfolio should be sold and placed in bills? (Input the value as a positive value. Do not round intermediate calculations and round your final percentage answer to 2 decimal places.) a-2. How much of the portfolio should be sold and placed in equity? (Input the value as a positive value. Do not round intermediate calculations and round your final percentage answer to 2 decimal places.) b-1. Calculate the put delta and the amount held in bills if the stock portfolio falls by 3% on the first day of trading, before the hedge is in place? (Input the value as a positive value. Do not round intermediate calculations. Round your…
Ranking investments by expected returns What makes for a good investment? Use the approximate yield formula or a financial calculator to rank the following investments according to their expected returns. Round the answers to two decimal places. Do not round intermediate calculations. Buy a stock for $45 a share, hold it for 3 years, then sell it for $75 a share (the stock pays annual dividends of $3 a share). % Buy a security for $25, hold it for 2 years, then sell it for $60 (current income on this security is zero). Do not round intermediate calculations. % Buy a 1-year, 12 percent note for $950 (assume that the note has a $1,000 par value and that it will be held to maturity). Do not round intermediate calculations. %
You are a provider of portfolio insurance and are establishing a four-year program. The portfolio you manage is currently worth $60 million, and you promise to provide a minimum return of 0%. The equity portfolio has a standard deviation of 25% per year, and T-bills pay 5.2% per year. Assume that the portfolio pays no dividends. Required: a-1. How much of the portfolio should be sold and placed in bills? (Input the value as a positive value. Do not round intermediate calculations and round your final percentage answer to 2 decimal places.) Portfolio in bills a-2. How much of the portfolio should be sold and placed in equity? (Input the value as a positive value. Do not round intermediate calculations and round your final percentage answer to 2 decimal places.) Portfolio in equity
You are an investment consultant working for a superannuation firm. One of the fixed-income portfolio managers wants to understand more about managing interest rate risk in the portfolio, and she is particularly interested in understanding the concept of duration. The portfolio currently contains option free bonds, but the manager is considering adding bonds with embedded options into the portfolio. The manager is also considering purchasing a three-year 6% annual coupon paying bond. The one-year spot rate is 4%, the two-year spot rate is 3%, and the three-year spot rate is 4%. A. What is the value of the option free bond that is being considered for purchase? State all formula and working used.