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- You are a bond portfolio manager and have $3 million that you will invest for 3 years. You have an obligation due in 3 years and you want to immunize your portfolio against interest rate risk over this horizon. You use the $3 million to invest in two zero coupon bonds: a 4 year bond and a 1 year bond. How much money should you invest in the 4 year bond? A) $0 B) $0.8 million C) $1 million D) $2 million E) $3 millionD3) Currently, the market interest rate on a bond is 10%. Yield-to-Maturity is a return you can reliaze when you are investing in a bond until its maturity. If you decide to sell the bond before the maturity, what would be your realized return like? and why?You want to invest in a risk-free investment for the next 3 years. You can invest in a 3-year zero coupon bond or you can invest in a 1-year zero coupon bond now, then in one year from now invest in a 2- year zero coupon bond. The spot interest rate on the 3-year bond is 3.25%. The spot interest rate on the 1-year bond is 2%. What spot interest rate do you expect to earn on a 2-year bond in one year from now?
- You are a bond portfolio manager and have $1.2 million that you will invest for 3 years. You have an obligation due in 3 years and you want to immunize your portfolio against interest rate risk over this horizon. You use the $1.2 million to invest in two zero coupon bonds: a 4 year bond and a 1 year bond. How much money should you invest in the 4 year bond? A) $600,000 B) $1.2 million C) $400,000 D) $800,000 E) $900,000Suppose you have an obligation to pay € 56 000 in 8 years time. To avoid interest risk you intend to hedge with two bonds. You can use one zero coupon bond that matures 10 years from now, and one bond that pays coupons once a year at the rate of 5% and matures in 3 years with a face value of 100. Assume a flat yield curve. (a) What amount do you have to invest in each of the two bonds during the first year to hedge your obligation if the yield is 5%? What is the payoff at maturity (face value) of your investment in the zero coupon bond? How many units of the coupon bond do you have to buy? (Assume that you can buy any fractional amount of the bonds.) (b) What is the value of your portfolio today if immediately after the investment the market rate falls to 4%? What will be the value in 8 years if interest rates will not change again?Assume you can buy a bond that has a par value of $1000, matures in 10 years, yielding 6% and has a duration of 5. If you would like to use this bond to form a guaranteed investment contract “GIC” and offer a guaranteed rate of return to investors for certain years. a. what is the maximum yield you can offer? Why? Explain. b. For how many years would you make the guarantee? Explain.
- 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.)1. Suppose you purchase bond that has a coupon of $75, face value of S1,000, and current price of $1,100. What is your coupon rate? What is your current Save Answer yield? 2. Suppose you purchase a bond with a coupon of $50 for $1,010. You sell it one year later for $900. What rate of return did you carn?Suppose you purchase a 30-year, zero-coupon bond with a yield to maturity of 6%. You hold the bond for five years before selling it. a. If the bond's yield to maturity is 6% when you sell it, what is the internal rate of return of your investment? b. If the bond's yield to maturity is 7% when you sell it, what is the internal rate of return of your investment? c. If the bond's yield to maturity is 5% when you sell it, what is the internal rate of return of your investment? d. Even if a bond has no chance of default, is your investment risk free if you plan to sell it before it matures? Explain. Note: Assume annual compounding.
- An investor is presented with the following two alternative investment strategies: purchase a 3-year bond with an interest rate of 6% and hold it until maturity or, purchase a 1-year bond with an interest rate of 7%, and when it matures, purchase another 1-year bond with an expected interest rate of 6%, and when it matures, purchase another 1-year bond with an interest rate of 5%. What is the expected return of the first strategy? What is the expected average return over the 3-years for the second strategy? Why does our anayses of the expectations theory indicate that this is exactly what you should expect to find?A short question 4) 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 of 5 years, and a perpetuity*, each currently yielding 5%. a. How much of each bond will you hold in your portfolio? b. How will these ratios change next year if target duration is now 9 years? *: Perpetuity: a specal case of annuity, where n-> Inf, thus the maturity of the instrument is perpetual.b) Suppose that you are considering investing in a four-year bond that has a face value of $1,000 and a coupon rate of 5.5%. (i) What would be the price of the bond you will be paying if the market interest rate on similar bonds is 5%? What is the bond’s current yield? (ii) Now suppose you intend to sell the bond after two years of holding, but the market interest rate on similar bonds unexpectedly rises to 8%. How much would another investor be willing to pay for your bond? What was your rate of return on the bond?
