Asset Management

Tutorial 4

Practical applications of bond valuation and bond portfolio strategies

Question 1

How can a perpetuity, which has an infinite maturity, have a duration as short as 10 or 20 years?

Question 2

What is the duration of a 6% coupon bond making semi-annual coupon payments for 3 years until maturity with a face value of $1,000 if

a)   the yield to maturity is 6%, or alternatively,

b)   the yield to maturity is 10%?

Question 3

A 9-year bond paying coupons annually has a yield of 10% and a duration of 7.194 years. If the market yield changes by 50 basis points, what is the percentage change in the bond’s   price?

Question 4

An insurance company must make payments to a customer of $10 million in one year and $4 million in five years. The yield curve is flat at 10%.

a)   If the insurer wants to fully fund and immunize its obligation to this customer with a zero-coupon bond, what is the maturity of the bond it must purchase?

b)   What must be the face value and the market value of that zero-coupon bond?

Question 5

You are managing a portfolio of $1 million. Your target duration is 10 years, and you can invest in two bonds, a zero-coupon bond with maturity of five years and a perpetuity, each currently yielding 5%.

a)   How  much of (i) the zero-coupon  bond and (ii) the perpetuity will you hold in your portfolio?

b)   How will these fractions change next year?

Question 6

You are an asset manager. You are looking to offer your client some return exposure to bonds. Consult the key investor information document (KIID) for the AXA Sterling Corporate Bond Fund which is uploaded on Keats. Focus on the following questions:

a)   What types of assets does this fund invest in?

b)   Is the fund closed or open-ended?

c)   Does it follow an active or a passive strategy?

d)   What are the key risks for investors to consider?

e)   Who would you recommend this fund to?