MCB has just issued a guaranteed investment contract (GIC). MCB needs to immunizethis GIC, which guarantees a single payment of USD160,000,000 in 4 years and providesa bond equivalent yield of approximately 3.50%. The investment team calculated thepresent value of the GIC to be USD 145,700,000. This is the amount they intend to investtoday to immunize the GIC. WB is not permitted to use leverage and the current durationis 4.MCB is building a suitable portfolio and already holds the U.S. government bonds shownin Exhibit 1.Existing Portfolio BondsBondMarket Price (USD)Total Market Value (USD)Total Dollar DurationBond A102.3249,113,600954,278Bond B94.959,630,0004,209,878MCB must choose a U.S. government bond to complete the immunized portfolio. Theinvestment team has gathered the data shown in Exhibit 2.Bonds Available to Complete Immunized PortfolioYield to Maturity3.52%Modified DurationMarket Price (USD)99.97BondBond X1.333Bond Y99.363.89%2.154Bond Z99.353.85%1.810Determine which bond (X, Y, or Z) is the most suitable for MCB to complete theimmunized portfolio. Justify your response with one reason. Show your calculations.What are the risks associated with holding a portfolio of bonds?

Bond Immunization: It refers to the strategy of risk mitigation that matches the duration of assets…

MCB has just issued a guaranteed investment contract (GIC). MCB needs to immunize this GIC, which guarantees a single payment of USD160,000,000 in 4 years and provides a bond equivalent yield of approximately 3.50%. The investment team calculated the present value of the GIC to be USD 145,700,000. This is the amount they intend to invest today to immunize the GIC. WB is not permitted to use leverage and the current duration is 4. MCB is building a suitable portfolio and already holds the U.S. government bonds shown in Exhibit 1. Bond Bond A Bond B Bond X Bond Y Bond Z Market Price (USD) 102.32 94.9 Bond Existing Portfolio Bonds Total Market Value (USD) 49,113,600 59,630,000 MCB must choose a U.S. government bond to complete the immunized portfolio. The investment team has gathered the data shown in Exhibit 2. Bonds Available to Complete Immunized Portfolio Market Price (USD) Yield to Maturity 99.97 3.52% 99.36 3.89% 99.35 3.85% Total Dollar Duration 954,278 4,209,878 Modified Duration 1.333 2.154 1.810 Determine which bond (X, Y, or Z) is the most suitable for MCB to complete the immunized portfolio. Justify your response with one reason. Show your calculations. What are the risks associated with holding a portfolio of bonds?

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter16: Working Capital Policy And Short-term Financing

Section: Chapter Questions

Problem 24P