Suppose that the current YTM is 8% and assume semi-annual compounding. We have a liabilityto pay $10,000 in 7 years. In order to construct a hedged portfolio, we can use the bonds as follows:BondMaturity(year)Coupon rate Par valueYTM(%)($)(%)A3Compoundingfrequency6100824Be68010082Ce1040100820ㄎLiabilityA37010000824We want to construct an asset portfolio by purchasing bond A, B, and C in a way that the values,durations, and convexity measures of the asset portfolio match those of the liability (immunization).How many bonds do we need to buy?<t←Moreover, suppose that yields suddenly drop from 8% to 7%. Construct a table to check theperformance of immunization.

In order to create an immunized asset portfolio, the durations and convexity of the liabilities must…

We want to construct an asset portfolio by purchasing bond A, B, and C in a way that the values, durations, and convexity measures of the asset portfolio match those of the liability (immunization). How many bonds do we need to buy? L

We want to construct an asset portfolio by purchasing bond A, B, and C in a way that the values, durations, and convexity measures of the asset portfolio match those of the liability (immunization). How many bonds do we need to buy? L

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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Similar questions

Suppose that a portfolio consist of three securities: A, B and C with expected rates of return of 5%, 9% and 14% respectively. Find the expected rate of return on each of the following two portfolios of these securities: Portfolio A where wA = WB = Wc Portfolio B where wA = WB = 2wc Assume that you currently have $10,000 and that the risk of each portfolio is 10%. Which portfolio which you choose and why? b) How much will you have invested in each security in each instance? c) What is the expected value of the portfolio one year from today? d) What is the expected return on the portfolio in $ terms, assuming no taxes nor fees?
Under the current market conditions Bond 1 has a price of 90 and a Mccauley duration of 10, and Bond 2 has a price of 110 and Macauley duration of 15. A portfolio is created with a combination of face amount F₁ of Bond 1 and F2 of Bond 2. The combined face amount of the portfolio is F1+F2= 100, and the Macauley duration of the portfolio is 12.5. Set up the equations for finding the portfolio value X. (a) 15X9F1 + 16.5(100-F₁), X=9F₁+1.1(100-F₁) (b) 12.5X9F1 +15(100-F₁), X= .9F₁ + 1.1(100-F₁) (c) 12.5X = 9F₁ + 16.5(100-F₁), X= .9F₁+1.1(100-F₁) (d) 12.5X = 10F₁ +16.5(100-F₁), X = .9F₁+1.1(100-F₁) (e) none of these
8. Assume the risk-free rate is 6.7% and the expected return on the market portfolio is 7.8%. Use the capital asset pricing model (CAPM) to find the required return for each of the securities in the table here, 7. Review On Click the icon to see the Worked Solution. The required return for investment A is %. (Round to one decimal place.) The required return for investment B is %. (Round to one decimal place.) The required return for investment C is %. (Round to one decimal place.) The required return for investment D is %. (Round to one decimal place.) The required return for investment E is %. (Round to one decimal place.) 7: Data Table (Click on the icon here in order to copy its contents of the data table below into a spreadsheet.) Security Beta A 1.34 в 0.93 0.13 0.96 E 0.67
For the upcoming year, the risk-free rate is 2 percent, and the expected return to the market is 7 percent. You are also given the following covariance matrix for Securities J,K, andL. \table[[Covariance,Security J,Security K,Security L],[Security J,0.0012532,0.0010344,0.0019711],[Security K,0.0010344,0.0023717,0.0013558],[Security L,0.0019711,0.0013558,0.0048442]] Also assume that you form a portfolio by putting 0 percent of your funds in Security J, 40 percent of your funds in Security K, and 60 percent of your funds in Security L. Based on this information, determine the standard deviation of the resulting portfolio. ◻ 6.47% 5.27% 4.98% 5.82% 4.77%
Bond valuation related problems should be solved by using a financial calculator or MS excel spreadsheet. Accordingly, you must show the values of all relevant time valu of money variables If D1 = $1.25, g(which is constant) = 4.7%, and Po= $26.00 what is the stocks expected dividend yield for the coming year?
2.Consider a portfolio of 3 bond A and 2 Annuity B, the yield rate is i=5% for A and B. Bond A: F= C = $1000, 4-year with annual coupon at 4%, Annuity B: A one-year deferred annuity-immediate with 3 level payments 50. (1) What is the PV of this portfolio? (2) Find the Macaulay Duration D, and Dg (3) Find the Modified Duration MD and MDg (4) Find the Modified Duration for the portfolio. (5) Use modified approximation to estimate the change in PV when both bond yield rate rise by 0.2%
Suppose you are considering two possible investment opportunities: a 12-yearTreasury bond and a 7-year, A-rated corporate bond. The current real risk-free rateis 4%, and inflation is expected to be 2% for the next 2 years, 3% for the following4 years, and 4% thereafter. The maturity risk premium is estimated by this formula:MRP = 0.02(t - 1)%. The liquidity premium (LP) for the corporate bond is estimatedto be 0.3%. You may determine the default risk premium (DRP), given thecompany’s bond rating, from the table below. Remember to subtract the bond’s LPfrom the corporate spread given in the table to arrive at the bond’s DRP. Whatyield would you predict for each of these two investments?RateCorporate Bond Yield
Suppose your friend is debating purchasing a bond that has a $1,000 par value, 13 years to maturity, and a 7% annual coupon. Your friend would like to determine the yield to maturity if the bond sells for a price of $980. In order to use your financial calculator to solve for the rate of return on this bond, you need to know the following information: PV: the bond's value or price N: the number of years before the bond matures PMT: the dollars of interest paid each year, which equals the coupon rate times the par value of the bond FV: par, or maturity, value of the bond Complete the following table by selecting the appropriate values for N, PV and PMT. Then use your financial calculator to solve for the rate of return, and complete the final row of the table. Input $1,000 Keystroke I/Y PV PMT FV Output Suppose your friend wants to know what price the bond will be in three years assuming the yield to maturity remains constant. To calculate what the bond price will be three years from…
Suppose you are considering two possible investment opportunities: a 12-year Treasury bond and a 7-year, AA-rated corporate bond. The current real risk-free rate is 3%, and inflation is expected to be 2% for the next 2 years, 3% for the following 4 years, and 4% thereafter. The maturity risk premium is estimated by this formula: MRP = 0.02(t - 1)%. The liquidity premium (LP) for the corporate bond is estimated to be 0.3%. You may determine the default risk premium (DRP), given the company's bond rating, from the following table. Remember to subtract the bond's LP from the corporate spread given in the table to arrive at the bond's DRP. Corporate Bond Yield Rate Spread = DRP + LP U.S. Treasury 0.73 % — AAA corporate 0.93 0.20 % AA corporate 1.33 0.60 A corporate 1.75 1.02 What yield would you predict for each of these two investments? Round your answers to three decimal places. 12-year Treasury yield: 6.553%----->correct 7-year Corporate yield: ? %…
Suppose you are considering two possible investment opportunities: a 12-year Treasury bond and a 7-year, AA-rated corporate bond. The current real risk-free rate is 3%, and inflation is expected to be 3% for the next 2 years, 4% for the following 4 years, and 5% thereafter. The maturity risk premium is estimated by this formula: MRP = 0.02(t - 1)%. The liquidity premium (LP) for the corporate bond is estimated to be 0.2%. You may determine the default risk premium (DRP), given the company's bond rating, from the following table. Remember to subtract the bond's LP from the corporate spread given in the table to arrive at the bond's DRP. Corporate Bond Yield Rate Spread = DRP + LP U.S. Treasury 0.83 % — AAA corporate 1.03 0.20 % AA corporate 1.39 0.56 A corporate 1.75 0.92 What yield would you predict for each of these two investments? Round your answers to three decimal places. 12-year Treasury yield: fill in the blank 7 % 7-year Corporate yield: fill in the blank 8 %
Suppose you are considering two possible investment opportunities: a 12-year Treasury bond and a 7-year, A-rated corporate bond. The current real risk-free rate is 3%, and inflation is expected to be 2% for the next 2 years, 3% for the following 4 years, and 4% thereafter. The maturity risk premium is estimated by this formula: MRP = 0.02(t - 1)%. The liquidity premium (LP) for the corporate bond is estimated to be 0.3%. You may determine the default risk premium (DRP), given the company's bond rating, from the following table. Remember to subtract the bond's LP from the corporate spread given in the table to arrive at the bond's DRP. Corporate Bond Yield Rate Spread = DRP + LP U.S. Treasury 0.83 % — AAA corporate 1.03 0.20 % AA corporate 1.39 0.56 A corporate 1.79 0.96 What yield would you predict for each of these two investments? Round your answers to three decimal places. 12-year Treasury yield: fill in the blank _ % 7-year Corporate yield: fill…
If d1 = 1.25, g (which is constant) = 4.7%, and Po = $26, what is the expected dividend yield for the coming year? Bond valuation related problems should be solved by using a financial calculator or MS excel spreadsheet. Accordingly, you must show the values of all relevant time valu of money variables

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