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International Financial Markets - Essay Example

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International Financial Markets

From this point, bond portfolios can be restructured in a systematic manner outlined as under: In the events when interest rates are expected to decrease, it would be advisable to restructure the bond portfolios drifting towards securities constituting long-term maturities. This will allow the portfolios to earn maximum capital gain because there is a stronger likelihood that the price of the bonds having long maturities are expected to increase by a greater amount than that of bonds having short maturities in case of a decrease in the yields. Conversely, in the events of an increase in the interest rates, it would be advisable to restructure the bonds portfolios drifting towards short-term securities as it may likely to result in decreasing the capital losses from a decrease in the prices of long-term maturities compared to the increase in the prices of securities having short-term maturities. ...
ter 1 year Price of Bond 2 (5yr) after 1 year Price of Bond 3 (10yr) after 1 year Price of Bond 4 (20yr) after 1 year Price of Bond 1 (2yr) after 2 years Price of Bond 2 (5yr) after 2 years Price of Bond 3 (10yr) after 2 years Price of Bond 4 (20yr) after 2 years Bond Current Price P1 P2 2yr 109.5 104.4599 105 5yr 120.23 115.0694 109.2377 10yr 126.63 122.9504 118.6706 20yr 126.46 123.9087 121.6928 Holding Period Returns Bond 1 (2yr) Return for 1 year: 0.23 - 5.04006 = -4.81 Bond 2 (5yr) Return for 1 year: 0.85 - 5.16058 = -4.31 Bond 3 (10yr) Return for 1 year: 2.03 - 3.67964 = -1.64 Bond 4 (20yr) Return for 1 year: 3.19 - 2.55135 = 0.638 Bond 1 (2yr) Cumulative Return for 2 years: [0.23(1.0113) + 0.23] -4.5 = -4.0374 Bond 2 (5yr) Cumulative Return for 2 years: [0.85(1.0113) + 0.85] -10.99 = -9.2804 Bond 3 (10yr) Cumulative Return for 2 years: [2.03(1.0113) + 2.03] -7.96 = 3.877 Bond 4 (20yr) Cumulative Return for 2 years: [3.19(1.0113) + 3.19] -4.76 = 1.656 Bond 1-year Return 2-year Return 2yr -4.81 -4.0374 5yr -4.31 -9.2804 10yr -1.64 3.877 20yr 0.638 1.656 Task 5 Holding period return is considered as quite significant because the period covering this return pertains to the time horizon for which the investment is to be held in the portfolio. In the light of the holding period returns generated for the four bonds, it can be closely observed that if the time horizon is kept as 1 year, securities having short-term maturities, are unable to provide any returns, rather they are incurring losses. Only 20-year bond is providing the holding period return of 0.638 while rest of the other three securities, are in negative zone. On the other hand, if the 2-year time horizon for holding the securities in the portfolio is taken into consideration, it can be noted that the ...Show more

Summary

Duration and Bond Investment Management Task 1 Duration is the concept that is used to demonstrate and quantify the element of risk present in fixed-income securities. There are numerous kinds of fixed-income securities, different in nature due to their coupon rate, yields, prices, maturities, etc…
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International Financial Markets essay example
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