The Theory and Practice of Investment Management: Asset Allocation, Valuation, Portfolio Construction, and Strategies, Second Edition

QUESTIONS

1. Suppose that you are reviewing a price sheet for bonds and see the following prices (per $100 par value) reported. You observe what seem to be several errors. Which bonds seem to be reported incorrectly and explain why?

2. Why may the yield to call for a bond have more than one value?

3. A portfolio manager is considering buying two bonds. Bond A matures in four years and has a coupon rate of 6% payable semiannually. Bond B, of the same credit quality, matures in 10 years and has a coupon rate of 8% payable semiannually. Both bonds are priced at par.

a. Suppose that the portfolio manager plans to hold the bond that is purchased for four years. Which would be the preferred bond for the portfolio manager to purchase?

b. Suppose that the portfolio manager plans to hold the bond that is purchased for six years instead of four years. In this case, which would be the preferred bond for the portfolio manager to purchase?

4. Consider a 5% 14-year bond with a maturity value of $100 that is option free and is selling to yield 6%.

a. What is the bond’s price?

b. What is the price value of a basis point for this bond?

c. What is the bond’s duration using the formula given by equation (17.5) and changing interest rates by 10 basis points?

d. Is the duration calculated in (c) a modified duration or an effective duration? Explain why?

e. If market yields change by 100 basis points, ...