Relationship between reinvestment risk and price risk

Assignment Help Portfolio Management

Reference no: EM131468234

Investment Management Assignment

Answer the following questions:

SECTION A- PARAGRAPH 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: Note: Show all formulae, workings, steps and calculations.

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

Reference no: EM131468234

Questions Cloud

Describe the risk associated with netflixs investment : Describe the risk associated with Netflixs investment in content-Describe the risk associated with Outerwall Inc.'s investment in content.

Organizations that outsource such work : Elaborate about how each of those issues affects the organizations that outsource such work. Provide at least one example of a practical situation.

Identify the top five most popular choices of hybrid cars : Determine which type of car would work best for you and your family. Justify your decision based on your analysis of the five hybrid cars.

Are virus attacks increasing in frequency : Using some website resource, such as www.f-secure.com, look up recent computer virus outbreaks. ow many virus outbreaks have occurred in the past 7 days?

Relationship between reinvestment risk and price risk : IMAN1B-7 Investment Management Assignment. Define reinvestment risk and describe the relationship between reinvestment risk and price risk

Impact on the way health care is provided : What current legislation has had the maximum impact on the way health care is provided?

Is it wrong to sculpt such figures au naturale : How was Michelangelo's choice to depict these figures in the nude connected to the Renaissance worldview?

What set of standards would technology hospital have : Many hospitals accept credit cards for payment of services. If this information is not properly protected, the holder of the credit card (the consumer).

Component of a risk management plan : Complete at least one component of a Risk Management Plan

Reviews

len1468234

4/20/2017 2:16:10 AM

Note to student: You will be penalised for the copying of theory without explanation/application to the scenario provided. You should use the theory in support of your own answer. Non-application will result in a zero mark being awarded. Students are required to acknowledge the sources of ideas, concepts, models and arguments they use in their assignment. The Harvard Referencing Method (as adapted and explained in the Milpark Reference Guide) must be used when students reference a source used. Examples of how this must be done can be found in the Milpark Reference Guide. Please familiarise yourself with this method, as it is the only method that will be accepted.

Write a Review

Required(*) Message

User Account

All Pages