c. The investments officer for Sillistine Savings is concerned about interest rate risk lowering the value of the institution's bonds. A check of the bond portfolio reveals an average duration of 4.5 years. How could this bond portfolio be altered in order to minimize interest rate risk within the next year?

c. The investments officer for Sillistine Savings is concerned about interest rate risk lowering the value of the institution's bonds. A check of the bond portfolio reveals an average duration of 4.5 years. How could this bond portfolio be altered in order to minimize interest rate risk within the next year?

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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Suppose a company is choosing between bank loans and bonds. The interest rate in the bank loan is 3.5%, and an investment bank predicted that the company will pay close to 4% to issue a bond with the same maturity. In addition, fees are estimated to be higher for the bond issuance than for the bank loan. Explain why this company may still decide to issue the bond rather than borrowing through a bank.
A manager of a commercial bank’s security portfolio is analyzing three bonds and is using duration as the measure of interest rate risk. The three bonds all trade at a yield to maturity of 10 percent and have $10,000 par values. The bonds differ only in the amount of annual coupon interest that they pay: 8, 10, or 12 percent. What is the duration for each five-year bond? What is the relationship between duration and the amount of coupon interest that is paid?
D4) Finance An investor has two choices: a) Investing in a five-year bond and hold it for five years b) Investing in a two-year bond and reinvesting in a three year bond when it matures If the investor opts for choice a), he/she eliminates the following risk/s: Group of answer choices °price risk and currency risk °reinvestment risk and currency risk °interest rate risk and currency risk °reinvestment risk °None of the answers are correct
1) What are the factors affecting the discount rate used in project valuation? 2) A bond was issued with interest payment every 3 months. The coupon rate of the bond is 12%. The yield to maturity of the bond is 16%. The nominal value of the bond is 1000 TL. The maturity of the bond is 5 years. What is the market price of this bond? Is this bond a discounted or premium bond?
Give typing answer with explanation and conclusion Consider the prevailing condition of inflation (including changes in global oil price), the economy, budget deficit, decreases in expected remittance inflow, and the central bank monetary policy that could affect interest rate. Based on the prevailing conditions do you think bond price will increase or decreases in next six-month period. In the real economic environment which other factors may affect the bond price? Which factor in your opinion will have biggest impact on bond price? Assess the above given situations.
Suppose the returns on long-term government bonds are normally distributed. Assume long-term government bonds have a mean return of 6.1 percent and a standard deviation of 9.8 percent. What is the approximate probability that your return on these bonds will be less than −3.7 percent in a given year? Use the NORMDIST function in Excel® to answer this question. Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. What range of returns would you expect to see 95 percent of the time? Note: A negative answer should be indicated by a minus sign. Enter your answers from lowest to highest. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16. What range would you expect to see 99 percent of the time? Note: A negative answer should be indicated by a minus sign. Enter your answers from lowest to highest. Do not round intermediate calculations and enter…
Consider two types of bonds: A 10 year to maturity corporate bond and a 10 year to maturity Treasury bond. We know that Corporate Bonds have default risk. Discuss the impact on the markets for these two type of bonds & on the risk premium when there is a FALL in the risk of corporate default? Provide a DISCUSSION of the impact and ILLUSTRATE the impact graphically using two diagrams, one for corporate bonds and one for Treasuries. The diagrams should show the impact on each yield and the impact on the risk premium [label your diagram clearly to illustrate the old premium vs. the new premium]. hint: draw your diagrams side by side, so you can show the risk premiums as done in lecture.
Solve these 2 practice problems
Suppose you are a bond dealer looking for arbitrage opportunities. The first column in the table below shows the current prices of the four government bonds (without default risk). Assume that you can buy and short these bonds at a given price. The remaining columns of the table are the cash flows generated by the bonds at the end of the first, second and third years. All bonds mature at the end of the third year. Are there arbitrage opportunities for the prices of these four types of bonds? If it exists, how can you seize this opportunity?
A client is reviewing a year-end portfolio report. Since the beginning of the year, market yields have increased slightly. In comparing the beginning-of-the-year price for the bonds selling at a discount from par value to the end-of-year prices, the client observes that all the prices are higher. The client is perplexed since he expected that the price of all bonds should be lower since interest rates increased. Explain to the client why the prices of the bonds in the portfolio selling at discount have increased in value.
As bonds approach their maturity dates, www A. prices will approach their par values. OB. the risk of a call will increase. OC. premiums or discounts will increase. O D. the bonds' prices will become more sensitive to changes in interest rates.
Which of the following statements is the most accurate? 43. a. Long-term cash flows are riskier than short-term cash flows.Furthermore, a 20-year bond that is callable after 5 years would have a shorter projected duration, if not none at all, than a noncallable 20-year bond with equal maturity. As a result, if all other features are equal, investors can demand a lower rate of return on the callable bond than on the noncallable bond. b. A noncallable 20-year bond would have an average life that is equivalent to or better than a callable 20-year bond with otherwise similar characteristics. Furthermore, the longer a bond's lifespan, the higher the interest rate danger it poses to buyers. As a result, while all other factors remain stable, callable bonds subject borrowers to fewer interest rate risk than noncallable bonds. c. Both a and b are right statements. d. None of the above claims are true.

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