Fixed Income homework Case Solution
Question 1 (B)
From the following analysis, it seems that there are three types of bonds under different maturity periods. The analysis through the use of expected duration illustrates the time at which the investor would receive the coupon payment plus the principal amount upon maturity. Thus, the calculated values indicate that Bond one would receive the duration before the end of the maturity it held. It means that an investor would receive his coupon plus principle before the execution of the maturity period.
It also shows the less risk and returns that he would face in the current scenario. On the other side, Bond two has the duration of 16.20; it identifies the overtime under which, an investor would wait to receive the coupon and principal amount accordingly. With all these considerations, it is concluded that an overall portfolio duration would be 11.59, it indicates the expected receive of payments and principle amount by various investors based on the size of maturity of the bonds.
Question 2 (4B)
A basis point is a decimal point that includes a change in the yield of a bond based on the direction it takes to cover. So, the change in yield means that the price would also change accordingly with the change in the price of the bond. The increase in yield typically decrease the amount of the bond and so determine the risk to reduce the value at maturity if the same level of return would involve overtime. Thus, the values obtained identifies the increase in the yield of both of the selected bonds and thus, decrease the market value at the maturity.
According to the financial condition of the company, it has been determined that ABC, Inc. would tend to increase its financial position I the upcoming years based on the projected data analyzed by Ms. Y. On the other side, the credit rating information by S & P shows various ratings based on the ratio of the industry trend as well as financial components.
So, it is identified that S&P rated ABC incorporation as BB based on the projected results it would perform by the use of historical trends but the situation seems in contrast to it because the company continuously improved its financial position and performance. Thus, the expected ratios illustrate that the projected ratings would be more than BB. Ms. Y should first analyze the expected results of the next five years as well as the operational efficiency of the company.
She should relate the Standard ratings with the average ratios of the selected years to justify the final ratings imposed by S&P. The perception of Ms. Y would be to demand an increase in the ratings of the bonds because some of the ratios are still standing on BBB and A rating, while others are on the same route defined by S&P.
Thus, her recommendation would be to increase the overall ratings of the bonds based on the average score results as well as the projected financial data that a company would improve in the upcoming year’s ton stand in a position of A ratings or high………………………
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