Question 5: a). Consider two annual coupon bonds, each with two years to maturit

Question

Question 5: a). Consider two annual coupon bonds, each with two years to maturity. Bond A has a 7% coupon and price of $1000.62. Bond B has a 10% coupon and sells for $1,055.12. Find the two one-period forward rates that must hold for these bonds. b). You manage a portfolio for Ms. Greenspan, who has instructed you to be sure her portfolio has a value of at least S350,000 at the end of six years. The current value of Ms. Greenspan's portfolio is S250,000. You can invest the money at a current interest rate of 8%. You have decided to use a contingent immunization strategy. i. What amount would need to be invested today to achieve the goal, given the current interest rate? i Suppose that four years have passed and the interest rate is 9%. What is the trigger point for Angel's portfolio at this time? (That is, how low can the value of the portfolio be before you will be forced to immunize to be assured of achieving the minimum acceptable return?) If the portfolio's value after 4 years is $291,437 what should you do? (15 Marks)

Explanation / Answer

5 a) Let Face Value of both the bond be $1000.

Bond A Forward Rate = {Coupon Amount + ( Face Va;ue – Price)/ n } / {( Face Va;ue +Price)/ 2}

                                      = {70 + (1000 – 1000.62)/1 } / {( 1000 +1000.62)/ 2}

                                       = 69.38 / 1000.31

                                        =~ 6.94%

Bond B Forward Rate = {Coupon Amount + ( Face Va;ue – Price)/ n } / {( Face Va;ue +Price)/ 2}

                                      = {100 + (1000 – 1055.12)/1 } / {( 1000 +1055.12)/ 2}

                                       = 44.88 / 1027.56

                                        =~ 4.37%

Related Questions

Navigate

• Browse (All)
• Browse Q
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.