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(solution) FN480 Unit 4 Assignment 1. Go to the iShares website at


Please assist with this assignment. It seems confusing. 


FN480 Unit 4 Assignment

 

1. Go to the iShares website at www.ishares.com, and look up information about the following bond

 

index funds:

 

Barclays 1-3 Year Credit Bond Fund (CSJ)

 

Barclays Intermediate Credit Bond Fund (CIU)

 

iShares 10+ Year Credit Bond Fund (CLY)

 

a. Complete the table below

 

Bond Fund

 

Duration

 

CSJ

 

CIU

 

CLY Average Yield to Maturity b. Determine which of these three funds would be best for each of the following investors. Explain

 

your answers.

 

i. A very risk-averse investor

 

ii. An endowment fund expected to last in perpetuity

 

iii. An investor who tells you that they want as high a yield as possible consistent with an average

 

level of risk tolerance

 

c. Why must the yield to maturity be higher for funds with higher duration?

 

d. Compare the returns of the CSJ fund to the returns of the index that CSJ is based on. Why would

 

a difference exist? What is this difference called? 2. A fixed-income investor with a five-year time horizon has stated that he wants a guaranteed rate of

 

return regardless of any parallel shifts in market interest rates.

 

a. What is the name of the strategy that this investor should follow?

 

b. In constructing a portfolio for this investor, what is the most important variable to get right, and

 

what should the value of that variable be?

 

c. What will happen to the prices of the bonds in the portfolio if market interest rates rise? Given

 

this fact, what offsetting factor results in the guaranteed return? 3. An institutional investor has a $500,000 liability due at the end of each year for the next four years. It

 

would like to adopt a cash-matching strategy. The following bonds are available:

 

4-year maturity with coupon 6%

 

3-year maturity with coupon 5%

 

2-year maturity with coupon 4% 1-year maturity with coupon 3%.

 

a. In the first step of the cash-matching strategy, which bond is purchased, and for what principal

 

amount?

 

b. Which bond is purchased next? Will the principal amount need to be the same? Explain.

 

(Explaining the remaining steps of the process is not required, but I will give you feedback if you do.) 4. A manager has $100 million to invest, plus an additional $200 million that is borrowed at 2%. The

 

manager puts all $300 million into an investment with a 5% rate of return.

 

a. Find the return on the $100 million of the manager?s funds.

 

b. Find the return, less interest expense, on the $200 million that is borrowed.

 

c. Find the manager?s total rate of return (in percent).

 

d. This manager has used borrowing to amplify returns. What is the name of this strategy? 5. Five types of derivatives are listed here:

 

binary credit option

 

credit default swap

 

currency forward contract

 

interest rate futures contract

 

interest rate swap

 

Which type of derivative should be used in the following situations? Use each derivative type once

 

and only once. Explain your answers.

 

a. A company wishes to convert its adjustable-rate liability into a fixed-rate liability.

 

b. An investor is certain that company XYZ?s bonds will be downgraded.

 

c. An investor owns a foreign bond and is concerned about changes in the exchange rate.

 

d. An investor owns bonds in company LMN, and wants to shift the risk of a credit event to a

 

different investor.

 

e. An investor thinks that market interest rates in general will fall. 6. Suppose that you are advising a client about alternative investments. For each of the investment

 

types, give: A short explanation of what the investment is. At least two unique benefits or advantages of the investment OTHER THAN the fact that it will

 

provide diversification, or that it has low or negative correlation to other investments (which is

 

the same thing as providing diversification). At least two unique disadvantages or risks of the investment. At least two specific ways that the investment could be added to a portfolio. For example, one

 

way to add commodities to a portfolio is by purchasing shares of the iShares Gold Trust (ticker

 

symbol IAU). Do not copy this example for your own answer. a. Real estate explanation: benefits/advantages: disadvantages/risks: specific ways to add to a portfolio: b. Commodities explanation: benefits/advantages: disadvantages/risks: specific ways to add to a portfolio: c. Managed futures explanation: benefits/advantages: disadvantages/risks: specific ways to add to a portfolio:

 


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