Question

In: Finance

We would like to invest 1 000 000 USD and we have two bonds in our...

We would like to invest 1 000 000 USD and we have two bonds in our portfolio such as:

A….maturity = 5, coupon rate = 0 %, YTM = 10 %, FV = 100 USD

B…maturity = 2, coupon rate 12 %, YTM = 12 %, FV = 100 USD

What would be the yield of this portfolio when investment horizon is 3 years and

  1. When YTMs will be the same
  2. When YTMs will increase by 1 %
  3. When YTMs will increase by 2 %
  4. When YTMs will decrease by 1 %
  5. When YTMs will decrease by 2 %

WA=0,36 and WB=0,64

Solutions

Expert Solution

It is assumed that coupon payments of bond B are annual.

Yield n the question refers to current yield and YTM.

Current yield = Annual coupon/ Current price.

Bond A, being zero coupon bond, has zero current yield.

Price of both the bonds in 5 different scenarios are calculated using the PV function of Excel.

Details of price and current ratio in each of the scenarios are as follows:

Portfolio yield is the weighted average of the constituent bonds. The results are as follows:


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