Investment Management: Bond Prices, Yield Curve, and Portfolio Construction

Running head: INVESTMENT MANAGEMENT
Investment Management
Name of the Student:
Name of the University:
Authors Note:

INVESTMENT MANAGEMENT
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Table of Contents
Question 1:.................................................................................................................................2
a. Calculating bond prices and depicting yield curve:...............................................................2
b. Calculating Yield to maturity:................................................................................................3
c. Constructing arbitrage portfolio:............................................................................................5
Question 2:.................................................................................................................................5
a. Relationship between HPR and changes in the YTM:...........................................................5
b. Repeating the process with short sell:....................................................................................7
c. Relationship between HPR and changes in the Coupon rate:................................................8
Question 3:...............................................................................................................................10
a. Using present yield curve for detecting present value of the liability:.................................10
b. Calculating weights of the portfolio:....................................................................................10
c. Calculating PV of the liability and weights of the portfolio if yield curve shifts down size
by 100 basis points:..................................................................................................................11
References:...............................................................................................................................13

INVESTMENT MANAGEMENT
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Question 1:
a. Calculating bond prices and depicting yield curve:
Maturity (years) Market Price of Bond
0.50 100.69
1.00 103.34
1.50 100.80
2.00 102.47
2.50 99.67
3.00 103.55
3.50 103.43
4.00 103.08
4.50 100.25
5.00 100.65
5.50 101.56
6.00 102.00
6.50 100.00
7.00 99.50
7.50 100.47
8.00 101.54
8.50 99.74
9.00 100.68
9.50 100.13
10.00 99.76

INVESTMENT MANAGEMENT
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0.00 2.00 4.00 6.00 8.00 10.00 12.00
0.000%
0.500%
1.000%
1.500%
2.000%
2.500%
3.000%
3.500%
Yeild Curve
Zero-Coupon Yields
The general shape of the yield is approximately, as the above figure. However, the
curve is mainly smooth and tends to increase with tenure and decline after some years. The
change in bond prices and income tends to alter the YTM of the bond investment.
b. Calculating Yield to maturity:
Maturity (years) Semi-annually yield
0.50 0.24%
1.00 -0.71%
1.50 0.84%
2.00 1.00%
2.50 1.01%
3.00 1.66%
3.50 1.86%