Reinvestment risk problem

Assignment Help Finance Basics

Reference no: EM13712415

Reinvestment Risk Problem:

Merton is a bond portfolio manager at ABC Capital Partners. His fund recently purchased $500 million principal value of 2-year 12% coupon bonds at par value. Assume that the term structure of interest rates is flat.

Under each of the following 3 scenarios, calculate the actual rate of return earned on this bond investment, assuming ABC Capital Partners holds the bonds until maturity.

A. Assume the term structure instantaneously shifts from 12% to 17%. Compute the new price of the bonds. Assume ABC Capital Partners holds the bonds until maturity. Compute the holding period return for the bonds assuming the term structure remains at 17% over the
holding period.

B. Repeat part A assuming an instantaneous shift from 12% to 7%.

C. Explain the roles of interest rate risk and reinvestment rate risk in this example.

Reference no: EM13712415

Questions Cloud

Empirical duration question : 1. A bond trader is considering taking a position in a bond with complex embedded option features. Using recent transaction prices (below), calculate the bond's empirical duration. 4.50% is the current yield to maturity (y).

Find coefficient of friction between the crate and the floor : A large crate with mass m rest on a horizontal floor. The coefficient of friction between the crate and the floor are

Interest rate risk : A. Using the bond pricing equation, P(y), illustrate the derivation (using calculus) of this bond's modified duration. Note: the correct answer is an equation, not a number.

With what speed and angle of impact does the stone land : A student stands at the edge of a cliff and throws a stone horizontally over the edge with a speed of 14.0 m/s. With what speed and angle of impact does the stone land

Reinvestment risk problem : Merton is a bond portfolio manager at ABC Capital Partners. His fund recently purchased $500 million principal value of 2-year 12% coupon bonds at par value. Assume that the term structure of interest rates is flat.

Find the frictional force acting on the block : A 3.00 kg block starts from rest at the top of a 33.0Â° incline and slides 2.00 m down the incline in 1.80 s. Find the frictional force acting on the block

Determine the mass flow rate and pressure drop : velocity at impeller exit is 30.5 m/s and the slip factor is .9. Given that the flow area at impeller exit is .1m^2 and the total efficiency of the impeller is 90%, determine the mass flow rate.

What is the electric potential energy of the pair of charges : A point charge q1 is held stationary at the origin. A second charge q2 is placed at point a and the electric potential energy of the pair of charges is +7.0 x 10-9 J. What is the electric potential energy of the pair of charges

Are there any hidden assumptions or price rigidities : 1. Are there any hidden assumptions or price rigidities in the country or countries that might inhibit market force indicators from revealing the true economic health of the country, thereby either preventing government policy actions from corr..

User Account

All Pages