Case Problem 10.1 Max and Veronica Develop a Bond Investment Program
Questions
a. Describe the type of bond investment program you think the Shuman family should follow. In answering this question, give appropriate consideration to both return and risk factors.
b. List several types of bonds that you would recommend for their portfolio and briefly indicate why you would recommend each.
c. Using a recent issue of the Wall Street Journal, Barron's, or an online source, construct a $200,000 bond portfolio for the Shuman family. Use real securities and select any bonds (or notes) you like, given the following ground rules:
1. The portfolio must include at least one Treasury, one agency, and one corporate bond; also, in total, the portfolio must hold at least five but no more than eight bonds or notes.
2. No more than 5% of the portfolio can be in short-term U.S. Treasury bills (but note that if you hold a T-bill, that limits your selections to just seven other notes/bonds).
3. Ignore all transaction costs (i.e., invest the full $200,000) and assume all securities have par values of $1,000 (although they can be trading in the market at something other than par).
4. Use the latest available quotes to determine how many bonds/notes/bills you can buy.
d. Prepare a schedule listing all the securities in your recommended portfolio. Use a form like the one shown below and include the information it calls for on each security in the portfolio.
e. In one brief paragraph, note the key investment attributes of your recommended portfolio and the investment objectives you hope to achieve with it.
Case Problem 10.2 The Case of the Missing Bond Ratings
Questions
a. Three of these companies have bonds that carry investment-grade ratings. The other three companies carry junk-bond ratings. Judging by the information in the table, which three companies have the investment-grade bonds and which three have the junk bonds? Briefly explain your selections.
b. One of these six companies is an AAA-rated firm and one is B-rated. Identify those companies. Briefly explain your selections.
c. Of the remaining four companies, one carries an AA rating, one carries an A rating, and two have BB ratings. Which companies are they?
Case Problem 11.1The Bond Investment Decisions of Dave and Marlene Carter
Questions
a. Regarding the short-term trading opportunity:
1. What basic trading principle is involved in this situation?
2. If Marlene's expectations are correct, what will the price of this bond be in two years?
3. What is the expected return on this investment?
4. Should this investment be made? Why?
b. Regarding the bond swap opportunity:
1. Compute the current yield and the promised yield (use semiannual compounding) for the bond the Carters currently hold and for each of the three swap candidates.
2. Do any of the swap candidates provide better current income and/or current yield than the Beta Corporation bonds the Carters now hold? If so, which one(s)?
3. Do you see any reason why Marlene should switch from her present bond holding into one of the other issues? If so, which swap candidate would be the best choice? Why?
Case Problem 11.2 Grace Decides to Immunize Her Portfolio
Questions
a. Given the information provided, find the current yield and the promised yield for each bond in the portfolio. (Use annual compounding.)
b. Calculate the Macaulay and modified durations of each bond in the portfolio and indicate how the price of each bond would change if interest rates were to rise by 75 basis points. How would the price change if interest rates were to fall by 75 basis points?
c. Find the duration of the current four-bond portfolio. Given the seven-year target that Grace has set, would you consider this an immunized portfolio? Explain.
d. How could you lengthen or shorten the duration of this portfolio? What's the shortest portfolio duration you can achieve? What's the longest?
e. Using one or more of the four bonds described above, is it possible to come up with a $200,000 bond portfolio that will exhibit the duration characteristics Grace is looking for? Explain.
f. Using one or more of the four bonds, put together a $200,000 immunized portfolio for Grace. Because this portfolio will now be immunized, will Grace be able to treat it as a buy-and-hold portfolio-one she can put away and forget about? Explain.
Attachment:- Case-Problems.rar