ESSAYS

1 a) Analyze the effect of inflation on bonds b) How does liquidity affect bond prices and interest rates? c) Talk on systematic risk for bonds. 2. Expound on an investment policy statement you would prepare for your client who is a) an endowment fund and b) a pension fund Ascertain that you include risk analysis and return objectives 3. a) Define classical immunization. How do we use it in bond portfolio management (BPM)? b) Discuss the use of horizon matching in BPM. 4.A firm has a Z score of .9. Explain the prospects of the firm. Ascertain that you use the ratios influencing the score. Speak at length on those ratios. 5. Analyze the concept of default risk. Does the time period affect it? How? What are the ratings telling us? Besides financial issues, what other factors influence it? B. PROBLEMS 1. a) A bond pays 7% and it is taxable. How much will another bond of the same risk, which has no tax liability, pay equivalently? b ) what are the yield to maturity and the yield to call of a 20 year, 6% bond that is selling for $1050 has a call value of $1200 in year 3? Which will the investor make? 2. # 9 on page 7353.We have a bond that is paying 8% coupon rate , matures in 25 years and has a YTM of 8%.We are thinking of converting our investment to another bond that is the same as the held bond except that it has a ytm of 8.2%. If we make the swap, what will be our rate of return in the 2 cases. Besides the different ROR, is there any other difference? 3. We buy a 25 year, 10% bond yielding 9%. We sell it after 5 years when market rates are 12%. What is the realized compound yield during the 5 years, if YTM decreases, as soon as we buy it, and it remains at 8% for the 5 year duration. 4.We have a 15 year, 6% bond with YTM of 6%. There is a 15 year 5% bond yielding 6.2%. Because of analysis we have conducted, we estimate that the prospective bond will decline to 6% by the end of the year. Compute the rate of return we shall make, if we swap the one bond with the other one. 5. We have a 10 year, 8% bond which yields 5%. We feel that Is will drop, so we would like to invest in a 9% 20 year bond yielding 9%. If market rates fall by 1%, and we make the switch, what will the gain be? If instead, rates rise by 1%, what will be our loss? 6. A 7% 30 year bond is paying a market rate of 7%. What will the alteration of its price be, if the yield alters by 2%? Can you estimate it with duration ? If convexity is 40, what will the approximation be?