1 Assignment 2 Winter 2022 Problem 1 Assume you have the option to buy one of three bonds. All have the same degree of default risk and mature in 15 years. The first is a zero-coupon bond that pays $1,000 at maturity. The second has a 7 percent coupon rate and pays the $70 coupon once per year. The third has a 9 percent coupon rate and pays the $90 coupon once per year. a. If all three bonds are now priced to yield 8 percent to maturity, what are their prices? b. If you expect their yields to maturity to be 8 percent at the beginning of next year, what will their prices be then? What is your before-tax holding period return on each bond? If your tax bracket is 30 percent on ordinary income and 20 percent on capital gains income, what will your after-tax rate of return be on each? Assume you do not sell the bonds. c. Recalculate your answer to (b) under the assumption that you expect the yields to maturity on each bond to be 7 percent at the beginning of next year. d. Re-do the calculations in parts b and c above, assuming you will sell the bonds at the end of the year. Problem 2 A University endowment fund has sought your advice on its fixed-income portfolio strategy. The characteristics of the portfolios current holdings are listed below: Market Credit Maturity Coupon Modified Value of Bond Rating (yrs.) Rate (%) Duration Convexity Position A Cnd. Govt. 3 0 2.727 9.9 $30,000 B A1 10 8 6.404 56.1 $30,000 C Aa2 5 12 3.704 18.7 $30,000 D Agency 7 10 4.868 32.1 $30,000 E Aa3 12 0 10.909 128.9 $30,000 $150,000 a) Calculate the modified duration for this portfolio. b) Suppose you learn that the modified duration of the endowment’s liabilities is 6.5 years. Identify whether the bond portfolio is: i) immunized against interest rate risk, ii) exposed to net price risk, or iii) exposed to net re-investment risk. Briefly explain what will happen to the net position of the endowment fund if in the future there is a significant parallel upward shift in the yield curve. c) Your current active view for the fixed income market over the coming months is that Treasury yields will decline and corporate credit spreads will also decrease. Briefly discuss how you could restructure the existing portfolio to take advantage of this view. 2 Problem 3 A 20-year maturity bond with a 10% coupon rate (paid annually) currently sells at a yield to maturity of 9%. A portfolio manager with a 2-year horizon needs to forecast the total return on the bond over the coming 2 years. In 2 years, the bond will have an 18-year maturity. The analyst forecasts that 2 years from now, 18-year bonds will sell at yield to maturity of 8%, and that coupon payments can be reinvested in short-term securities over the coming 2 years at a rate of 7%. a) What is the 2-year return on the bond b) What will be the rate of return the manager forecasts that in 2 years the yiel ...

1. 1
Assignment 2 Winter 2022
Problem 1
Assume you have the option to buy one of three bonds. All have
the same degree of default risk
and mature in 15 years. The first is a zero-coupon bond that
pays $1,000 at maturity. The
second has a 7 percent coupon rate and pays the $70 coupon
once per year. The third has a 9
percent coupon rate and pays the $90 coupon once per year.
a. If all three bonds are now priced to yield 8 percent to
maturity, what are their prices?
b. If you expect their yields to maturity to be 8 percent at the
beginning of next year, what will
their prices be then? What is your before-tax holding period
return on each bond? If your tax
bracket is 30 percent on ordinary income and 20 percent on
capital gains income, what will
your after-tax rate of return be on each? Assume you do not sell
the bonds.
c. Recalculate your answer to (b) under the assumption that you
expect the yields to maturity on
each bond to be 7 percent at the beginning of next year.

2. d. Re-do the calculations in parts b and c above, assuming you
will sell the bonds at the end of the
year.
Problem 2
A University endowment fund has sought your advice on its
fixed-income portfolio strategy.
The characteristics of the portfolios current holdings are listed
below:
Market
Credit Maturity Coupon Modified Value of
Bond Rating (yrs.) Rate (%) Duration Convexity Position
A Cnd. Govt. 3 0 2.727 9.9 $30,000
B A1 10 8 6.404 56.1 $30,000
C Aa2 5 12 3.704 18.7 $30,000
D Agency 7 10 4.868 32.1 $30,000
E Aa3 12 0 10.909 128.9 $30,000
$150,000
a) Calculate the modified duration for this portfolio.
b) Suppose you learn that the modified duration of the
endowment’s liabilities is 6.5 years.
Identify whether the bond portfolio is: i) immunized against
interest rate risk, ii) exposed to net
price risk, or iii) exposed to net re-investment risk. Briefly

3. explain what will happen to the net
position of the endowment fund if in the future there is a
significant parallel upward shift in the
yield curve.
c) Your current active view for the fixed income market over
the coming months is that Treasury
yields will decline and corporate credit spreads will also
decrease. Briefly discuss how you
could restructure the existing portfolio to take advantage of this
view.
2
Problem 3
A 20-year maturity bond with a 10% coupon rate (paid
annually) currently sells at a yield to
maturity of 9%. A portfolio manager with a 2-year horizon
needs to forecast the total return on
the bond over the coming 2 years. In 2 years, the bond will have
an 18-year maturity. The analyst
forecasts that 2 years from now, 18-year bonds will sell at yield
to maturity of 8%, and that
coupon payments can be reinvested in short-term securities over

4. the coming 2 years at a rate of
7%.
a) What is the 2-year return on the bond
b) What will be the rate of return the manager forecasts that in 2
years the yield on 18-year bonds
will be 10%, and that the reinvestment rate for coupons will be
8%?
Problem 4
Shares of XYZ Corp. pay a $2 dividend at the end of every year
on December 31. An investor buys
two shares of the stock on January 1 at a price of $20 each, sells
one of those shares for $22 a
year later, on the next January 1, and sells the second share an
additional year later for $19. Find
the dollar- and time-weighted rates of return on the 2-year
investment.
Problem 5
An analyst wants to evaluate portfolio X, consisting entirely of
U.S. common stocks, using both
the Treynor and Sharpe measures of portfolio performance. The
following table provides the
average annual rate of return for portfolio X, the market
portfolio (as measured by the S&P
500), and U.S. Treasury bills during the past 8 years:
Average Annual

5. Rate of Return
Standard Deviation
of Return
Beta
Portfolio X 10% 18% 0.60
S&P 500 12% 13% 1.00
T-bills 6% N/A N/A
1. Calculate the Treynor and Sharpe measures for both portfolio
X and the S&P 500. Briefly explain
whether portfolio X underperformed, equalled, or outperformed
the S&P 500 on a risk-adjusted
basis using both the Treynor measure and the Sharpe ratio.
2. On the basis of the performance of portfolio X relative to the
S&P 500 calculated in part (a),
briefly explain the reason for the conflicting results when using
the Treynor measure versus the
Sharpe ratio.
3
Problem 6
Assume a 4-year Euro-note, with a $100,000 face value, a
coupon rate of 10% and a convexity
of 63.29. Today's YTM is 11.5%. Coupon frequency and

6. compounding frequency are assumed to
be annual.
(a.) What is the duration of this bond?
(b.) What is the exact price change in dollars if interest rates
decrease by 50 basis points?
(c.) Use the duration model to calculate the approximate price
change in dollars if interest rates
decrease by 50 basis points.
(d.) What does convexity measure? Incorporate convexity to
calculate the approximate price
change in dollars if interest rates decrease by 50 basis points.
Problem 7
The WorldValue fund has value weights on asset classes and
returns as given in the table below.
There are four major asset classes: Europe, Pacific, Emerging
and North America. The table also
shows the weights and returns of the fund's benchmar k
portfolio, the World Index.
(a.) How did the World Value fund perform compared with the
benchmark, over-performance
or under-performance?
(b.) Provide a performance attribution of World Value's return
in terms of its broad asset class
allocation and stock selection relative to the benchmark.
SEU HCM570
Critical Thinking Writing Rubric – Module 9

7. Exceeds Expectation Meets Expectation Below Expectation
Limited Evidence
Content, Research, and Analysis
21-25 Points 16-20 Points 11-15 Points 6-10 Points
Requirements Exceeds Expectation
-Includes all of the
required
components, as
specified in the
assignment.
Meets Expectation
- Includes most of
the required
components, as
specified in the
assignment.
Below Expectation
- Includes some of
the required
components, as
specified in the
assignment.
Limited Evidence -
Includes few of the
required
components, as
specified in the
assignment.
21-25 Points 16-20 Points 11-15 Points 6-10 Points
Content Exceeds Expectation

8. - Demonstrates
substantial and
extensive knowledge
of the materials,
with no errors or
major omissions.
Meets Expectation
- Demonstrates
adequate
knowledge of the
materials; may
include some
minor errors or
omissions.
Below Expectation
- Demonstrates fair
knowledge of the
materials and/or
includes some
major errors or
omissions.
Limited Evidence -
Fails to
demonstrate
knowledge of the
materials and/or
includes many
major errors or
omissions.
25-30 Points 19-24 Points 13-18 Points 7-12 Points
Analysis Exceeds Expectation

9. - Provides strong
thought, insight, and
analysis of concepts
and applications.
Meets Expectation
- Provides
adequate thought,
insight, and
analysis of
concepts and
applications.
Below Expectation
- Provides poor
thought, insight,
and analysis of
concepts and
applications.
Limited Evidence -
Provides little or no
thought, insight,
and analysis of
concepts and
applications.
13-15 Points 10-12 Points 7-9 Points 4-6 Points
Sources Exceeds Expectation
- Sources go above
and beyond
required criteria,
and are well chosen
to provide effective
substance and

10. perspectives on the
issue under
examination.
Meets Expectation
- Sources meet
required criteria
and are adequately
chosen to provide
substance and
perspectives on the
issue under
examination.
Below Expectation
- Sources meet
required criteria,
but are poorly
chosen to provide
substance and
perspectives on the
issue under
examination.
Limited Evidence -
Source selection
and integration of
knowledge from
the course is
clearly deficient.
Mechanics and Writing
9-10 Points 7-8 Points 5-6 Points 1-4 Points
Demonstrates
college-level
proficiency in

11. organization,
grammar and
style.
Exceeds Expectation
- Project is clearly
organized, well
written, and in
proper format as
outlined in the
assignment. Strong
sentence and
Meets Expectation
- Project is fairly
well organized and
written, and is in
proper format as
outlined in the
assignment.
Below Expectation
- Project is poorly
organized and
written, and may
not follow proper
format as outlined
in the assignment.
Limited Evidence -
Project is not
organized or well
written, and is not
in proper format as
outlined in the
assignment. Poor

12. quality work;
SEU HCM570
Critical Thinking Writing Rubric – Module 9
paragraph structure;
contains no errors in
grammar, spelling,
APA style, or APA
citations and
references.
Reasonably good
sentence and
paragraph
structure; may
include a few
minor errors in
grammar, spelling,
APA style, or APA
citations and
references.
Inconsistent to
inadequate
sentence and
paragraph
development,
and/or includes
numerous or major
errors in grammar,
spelling, APA style,
or APA citations

13. and references.
unacceptable in
terms of grammar,
spelling, APA style,
and APA citations
and references.
Total points possible = 105