FIN4002 - Fixed Income Securities - Risk and Return Using RCY - Finance Assessment Answer

Assessment Task:

FIN4002: Fixed Income Securities Finance Assessment Answer

Task

"Carlo will accept a recommendation different than his own only if it is justified by analysis," advises Ah Cheung. "Well-reasoned analysis is an opportunity to gain back
some of Carlo’ trust, which was lost after your last bond purchase." Ah Lee’s problem is to recommend the best investment among three different US Treasury bonds. The $10 million investment will be liquidated in three years to help repay a bank loan charging a fixed rate interest at 8.50% per year. The bonds, each with a $1,000 par value and annual convention, are described as following:

Questions 1. Would Ah Lee go by Carol’s view on interest rate remain unchanged for the next 3 years? Why or why not?

2. Risk and Return analysis
(i) Analyse the durations of the 3 bonds and why does that matter in the analysis? Explain.

(ii) Perform RCY analysis on the 3 bonds

3. Explain your recommendation on the investment of $10 million?

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