Issuer NameSymbolConvertible Coupon %Maturity DateCredit Rating – S&PList Price – Sale in $List Price – Yield in %CallablePuttableSchwab Charles Corp NewSCHW4836967Yes3.255/22/2029A (Investment)110.361.793
Yes (02/22/2029)
100
NoExxon Mobil CorpXOM4218990No3.5673/6/2045AA- (Investment)108.463.055
Yes (09/06/2024)
100
NoApple Inc.AAPL4208639No3.452/9/2045AA+ (investment)111.772.767
Yes (Continuous)
100
NoRoyal Caribbean Cruises LtdRCL4568009No3.703/15/2028
B
(High Yield)
95.984.399
Yes (12/15/2027)
100
NoJP Morgan Chase & CoJPM4203227No3.1251/23/2025A- (Investment)107.270.89
Yes (10/23/2024)
100
NoCaterpillar Inc.CAT4884921No3.259/19/2049A (Investment)110.442.711
Yes (03/19/2049)
100
NoIntel CorpINTC4914060No3.2511/15/2049A+ (Investment)106.582.904
Yes (05/15/2049)
100
NoKey Bk Natl Assn OhioKEY.KONo3.1810/15/2027A- (Investment)102.062.533No
Yes
(04/14/2022)
100
Please review the eight bonds listed above. As the newly hired financial advisor at a money management firm, you have been asked to review the interest rate risk of the bond portfolio constructed above. You must construct an exchange recommendation report for the client.
In this exchange recommendation report, consider the interest rate risk of the current eight bond portfolio, as demonstrated by the Macaulay and average modified durations of the portfolio. Evaluate current market expectations for interest rate movements. Provide an analysis to the client regarding the likely gains or losses in the market value of this bond portfolio, based on your evaluation of current market expectations for interest rate movements. Finally, recommend one bond to remove from the portfolio, and exchange with another fixed income security, in order to lower the interest rate risk within the portfolio.
In your body of the paper,
1/ Use your bonds listed on the table above and calculate the Macaulay and modified durations for each bond. Show your calculations.
2/Choose two bonds and construct an equally weighted portfolio.
oDetermine the cash flow yield of this portfolio.
oDetermine the Macaulay duration of the portfolio using the weighted average of time-to-receipt of the aggregate cash flows method.
oDetermine the modified duration of this portfolio. Please see section 3.5 of Chapter 4 for an example.
3/Using all your bonds, construct an equally weighted portfolio.
oDetermine the average Macaulay duration of this portfolio using the weighted average of the individual bond durations that comprise the portfolio.
oDetermine the average modified duration of this portfolio using the weighted average approach.
oEstimate the percentage loss in the portfolio’s market value if the (annual) yield-to-maturity of each bond goes up by 25 basis points (bp), 50 bp, and 100 bp.
4/Research and review at least two articles about the current market expectations for interest rates, which have been published within the last six months. Based on these articles,
oSummarize your research and analysis, and describe whether this bond portfolio is likely to gain or lose market value in the next six months.
oEstimate how large this gain or loss might be.
oBased on this opinion, recommend one change to this bond portfolio to lower the interest rate risk of the portfolio. You may remove one bond and replace it with one bond currently available on the market. You must continue to have a total of eight bonds in the portfolio.
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