Posted: May 30th, 2021
Bond Assignment | Homework For You
Select a coupon bond. The two bonds must have respectively 3 and 5 years remaining time to maturity (or at least as close as possible). You can use for this purpose main financial newspapers (Financial Times, Wall Street Journal) or databases (Datastream, Bloomberg).
Assume that the term structure of interest rates can only shift upwards or downwards (i.e., at any point of time all interest rates at all maturities can only change by equal margins). Additionally, ignore any issue related to default risk.
(a) Report clearly all bonds’ specifics and the source of your data. Then, calculate the Macaulay durations of the two bonds showing the full cash-flows working (Do not use the “duration” function on Excel; even if the quoted bond prices are given by your data-source, re-calculate them using the full cash-flow workings.) (15% mark)
(b) Suppose that you have £1 million to invest and you wish to construct a bond portfolio which is immunized with respect to a 4-year horizon. You opt for a duration-immunization. How much par of each of the two bonds do you buy?
(c) Suppose that during the first year of holding this portfolio, interest rates move: (i) up by 10 basis points; and (ii) up by 100 basis points. Show that your position is immunized by computing the change in value of your position at the 4-year horizon in each case (i) and (ii). How well is your portfolio protected against interest rate risk? Discuss and explain briefly your findings
The (brief) explanation and discussion requested for this part ( C) must be presented in the Word file ,Marking criteria will take into account clarity, correctness, rigor, efficiency, and parsimony. Overall word limit for Question 1 on the Word file must be 350 words maximum. Finance homework help
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