Investment Management ASSIGNMENT
SECTION A - PARAGRAPH QUESTIONS
Answer the following questions:
Question 1: You are a portfolio manager with three bonds in your portfolio: A, B and C. Assume that the discount rate provided in the table below for the three respective bonds is applied across all the cash flows for each bond. Take note that these are all annual coupon paying bonds.
|
Bonds
|
Years to maturity
|
Coupon
|
Par value
|
YTM (r)
|
Modified duration
|
Convexity
|
|
A
|
5
|
7%
|
5 000 000.00
|
6.25%
|
|
|
|
B
|
9
|
8%
|
10 000 000.00
|
7.50%
|
|
|
|
C
|
12
|
9%
|
15 000 000.00
|
8.75%
|
|
|
Required:
1. Describe in words how one would value a bond security.
2. Construct a cash-flow table, similar to the one below, and complete it to establish the present value (PV) of Bond B using the information provided.
|
Cash-flow - Bond A
|
|
Maturity (years)
|
YTM (r)
|
Discount Factor
|
R
|
PV
|
|
1
|
|
|
|
|
|
2
|
|
|
|
|
|
3
|
|
|
|
|
|
4
|
|
|
|
|
|
5
|
|
|
|
|
|
6
|
|
|
|
|
|
7
|
|
|
|
|
|
8
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
|
PV
|
|
3. Calculate the duration of Bond B.
4. Calculate the modified duration of Bond B.
5. Using your calculator, calculate the PV of bonds A and C.
6. Define reinvestment risk and describe the relationship between reinvestment risk and price risk.
7. Calculate the current yield of bonds A, B and C.
8. Explain whether Bond A is trading at a premium or a discount.
Question 2: Suppose that a bond with four years to maturity offers a yield to maturity (YTM) of 5.65% and that a five-year bond offers a YTM of 6%. Calculate the forward rate in the fifth year.
SECTION B - RESEARCH QUESTION
Question 1: The table on the next page depicts the South African Government & SOE Bond Market. This table displays the Yield-to-Maturity Mark-To-Market (MTM) for the various bonds as at 25 November 2016. The following link will take you to the most recent version of this table, provided by Sharenet:
https://www.sharenet.co.za/free/gilts.phtml.
Go to the link above and extract the information for the yield curve today (the day when you attempt this question).
Compare the yield curve extracted for today with the yield curve presented in the table on the next page. In your answer, focus on the changing shape of the yield curve between these two dates and discuss whether the yield curve inverted, flattened or normalised over the period.
Answer this question in 200 to 400 words in an essay style. You will be penalised if do not abide by the word count stipulated, and if you do not reference in line with the Milpark Referencing Guidelines.
Attachment:- Assignment File.rar