An investor is an avid bond purchase. He requires a 5% return on his bond purchases,...

An investor is an avid bond purchase. He requires a 5% return on his bond purchases, yet, the bonds today currently yield 4% as a AA rated bond. How can he achieve a 5% return on his bond purchases in the future?

Please explain also how he can reduce changes in bond prices that are part of his portfolio

Solutions

Expert Solution

He can achieve a 5% return on Bond purchases in the future if he is trying to switch to other bonds which are paying with higher rate of interest and this will mainly be lower rated bonds.

Lower rated bonds will be generally showing the investor with the higher amount of yieild and it will be providing him the required rate of return with higher risk. It can also mean that the investor can keep his present portfolio and add more bonds which are lower grade bonds in order to improve its yield.

Changes in the bond prices that are part of the portfolio can be managed through managing of the interest rate risk along with credit risk by subscribing to the higher quality bonds and investor can also try to enter into interest rate swaps in order to manage with the the fluctuations of the variable interest rates and he can also so take various bonds which are having the puttable option so he can redeem them before the maturity.

jeff jeffy answered 2 years ago

Next > < Previous

Related Solutions

An investor purchases one municipal bond and one corporate bond that pay rates of return of...

An investor purchases one municipal bond and one corporate bond that pay rates of return of 5% and 6.4%, respectively. The investor is in the 15% tax bracket. Please calculate his after-tax rates of return on both the municipal bond and the corporate bond. Please enter your answer with TWO decimal points. Muni bond: % Corp bond: %

An investor purchases one municipal bond and one corporate bond that pay rates of return of...

An investor purchases one municipal bond and one corporate bond that pay rates of return of 6% and 7.4%, respectively. If the investor is in the 15% tax bracket, his after-tax rates of return on the municipal and corporate bonds would be, respectively, _____. Multiple Choice 6.90% and 6.29% 6% and 7.4% 6% and 6.29% 5.10% and 7.4%

Frank is an avid investor. He borrows money to make investments during the year, he incurred...

Frank is an avid investor. He borrows money to make investments during the year, he incurred $3,500 of interest expense. During the year, he had the following income items $1,000 of qualified dividends, $500 of interest income from a corporate bond, $200 from a municipal bond and $6,000 of net L/T capital gains. How much of investment interest expense can Frank claim on his return?

An investor purchases one municipal and one corporate bond that pay rates of return of 7.2%...

An investor purchases one municipal and one corporate bond that pay rates of return of 7.2% and 9.1%, respectively. If the investor is in the 12% marginal tax bracket, his or her after-tax rates of return on the municipal and corporate bonds would be ________ and ______, respectively.

An investor with an investment horizon of 1.6 year purchases a 5% coupon bond with 2...

An investor with an investment horizon of 1.6 year purchases a 5% coupon bond with 2 years to maturity and a face value of $100? The bond is trading at a yield of 5%. Coupons are paid semi-annually. What is this investor's duration gap? Assume semi-annual compounding. Round your answer to 4 decimal places.

An investor purchases one municipal bond and one corporate bond that pay rates of return of 4.8% and 7.4%, respectively.

An investor purchases one municipal bond and one corporate bond that pay rates of return of 4.8% and 7.4%, respectively. If the investor is in the 23% tax bracket, his after-tax rates of return on the municipal and corporate bonds would be, respectively, _______ and _______.

An investor considers the purchase of a 2-year bond with a 5% coupon rate, with interest...

An investor considers the purchase of a 2-year bond with a 5% coupon rate, with interest paid annually and par of 100. The spot rates observed in the market today are as follows: 1-yr spot is 3%, the 2-yr spot is 4% and the 3-yr spot is 5%. The clean price of the bond is closest to: a. 101.93. b. 102.85. c. 105.81. d. 102.36. e. 103.10.

a. Suppose an investor can purchase a 5-year 8% coupon bond with a par value of...

a. Suppose an investor can purchase a 5-year 8% coupon bond with a par value of $100 that pays interest semi-annually. The yield to maturity for this bond is 9% on a bond-equivalent basis. What is the total future dollars and the total dollar return that should be generated from this bond if it is to yield 9%? b. What is the coupon interest, capital gain/loss and reinvestment income associated with this bond? Assume that the reinvestment rate is equal...

An investor is presented with the following two alternative strategies: (1) Purchase a 5-year bond with...

An investor is presented with the following two alternative strategies: (1) Purchase a 5-year bond with an interest rate of 3.85% and hold it until maturity, or (2) purchase a 1-year bond with an interest rate of 4.00% and when it matures, purchase another 1-year bond with an expected rate of 1.75% and when that matures, purchase another 1-year bond with an interest rate of 6.50%. The investor can purchase a fourth 1-year bond with an interest rate of 1.75%....

An investor purchases a bond in 2005 for $1,150 with 10 years to maturity.

An investor purchases a bond in 2005 for $1,150 with 10 years to maturity. The par value is $1,000. The annual coupon rate is 12 percent and coupon payments are made semi-annually. Assuming semi-annual compounding, what is the annual yield-to-maturity on the bond?Group of answer choicesa. 2.24 %b. 4.82%c. 6.06 %d. 9.63 %

Subjects