Question

In: Finance

We would like to invest the amount of 1 000 000 USD for 4 years. There...

We would like to invest the amount of 1 000 000 USD for 4 years. There we have zero-coupon bonds with the maturity of 1, 2, 3, 4…and 7 years with a uniform yield of 8 %. On this basis, we create 4 portfolios A, B, C, D such as:

Portfolio

Maturity

FV (USD)

A

4

1 360 489

B

3

629 856

5

734 664

C

2

583 200

6

793 437

D

1

540 000

7

856 912

  1. What the realized amount of each portfolio (the amount on the end of maturity) will look like, if YTM will decrease by 1 % day after the bonds purchase
  2. What the realized amount of each portfolio (the amount on the end of maturity) will look like, if YTM will increase by 1 % day after the bonds purchase

  1. What the realized amount of each portfolio will look like, if YTM will decrease by 1 % one day after purchase of the bonds and under this conditions we will sell this bond

  1. What the realized amount of each portfolio will look like, if YTM will increase by 1 % one day after purchase of the bonds and under this conditions we will sell this bond

Solutions

Expert Solution

a. The realized Amount of Each Portfolio (the amount of End of Maturity) will look Lik as under when YTM will decrease 1% (From 8% to 7%)

Portfolio Maturity FV (USD) realized amount Decresed By 1% YTM at the end of Maturity
A 4 1360489 1310796.0
B 3 629856 612521.5
5 734664 701275.9
C 2 583200 572450.0
6 793437 750365.2
D 1 540000 535000.0
7 856912 802890.7

b.The realized Amount of Each Portfolio (the amount of End of Maturity) will look Lik as under when YTM will Increase 1% (From 8% to 9%)

Portfolio Maturity FV (USD) realized amount Increased By 1% YTM at the end of maturity
A 4 1360489 1411581.6
B 3 629856 647514.5
5 734664 769312.0
C 2 583200 594050.0
6 793437 838550.1
D 1 540000 545000.0
7 856912 914019.6

c.The realized Amount of Each Portfolio when YTM will Decrease 1% (From 8% to 7%) one day after purchase of the bonds (i.e. begining Period)

Portfolio Maturity FV (USD) realized amount Decreased By 1% YTM one day after purchase of the bond
A 4 1360489 1310796.0
B 3 629856 612521.5
5 734664 701275.9
C 2 583200 572450.0
6 793437 750365.2
D 1 540000 535000.0
7 856912 802890.7

D.The realized Amount of Each Portfolio when YTM will Increased 1% (From 8% to 9%) one day after purchase of the bonds (i.e. begining Period)

Portfolio Maturity FV (USD) realized amount Increased By 1% YTM one day after purchase of the bond
A 4 1360489 1411581.6
B 3 629856 647514.5
5 734664 769312.0
C 2 583200 594050.0
6 793437 838550.1
D 1 540000 545000.0
7 856912 914019.6

Explainantion: All above values are calculate based on FV formula for zero bonds coupn rates..


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