gonell credit conditions, default risk, the duration statistic, the terms tructu
ID: 2764492 • Letter: G
Question
gonell credit conditions, default risk, the duration statistic, the terms tructure. marketability, seasoning, call protection, sinking fund provisions and me-first rules. 4. MINICASE A client has a $2 million portfolio. The client would like to put $500,000 into bonds. You could invest the money directly into T-bills or T-bonds, or buy one or more bond mutual funds. The purpose of the bond holdings is to fund the payment to a retirement community that the client plans to enter in 10 years. Two bond mutual funds that you are considering, A and B, have Macaulay duration statistics of 8.6 and 10.0 years, respectively. The yields to maturity on both funds are 8 percent. Your client is convinced that interest rates will fall over the next few years, and would like to take advantage of the decline to enhance her returns. If you decide to immunize the bond portfolio, then the best purchase would be: [4 1. (A) Bond Fund A because it allows for extra profit if interest rates fall (B) Bond Fund B because its duration matches the intended holding period (C) Direct purchases of bonds to create a portfolio whose duration equals 10 years (D) Treasury billsExplanation / Answer
Answer 1: B- Bond fund B becasue its duration matches with the intended holding period
Answer 2:D:Invest in T - bills as the interest rates are going up. Since both bond funds have positive duration, both of thenm are suidted for a falling interest rate senario
Answer 3:D: +9.2 % ( In generally, if the duration is 10 years, the for a % fall in interest rates, the bond price will rise by approximately 10% .Here the best option is 9.2%
Answer 4:B: 10-year,8%, government bond
Answer 5:D indeterminant based on the following information
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