FIN630 Investment Analysis & Portfolio Assignment 2 Idea Solution Spring On July 2013
MR. Hassan is a well-educated person who works in a private company as an accountant. Last week he inherited 1 million rupees from his aunt’s property. He is basically a risk averse investor. Stock market is much riskier than bond market. So he wants to select a bond for investment. For this purpose, as a part of bond analysis, he calculated the duration of bonds. He has two bonds as investment options.
a) The par value of Bond A is Rs.100, coupon rate is 10%, maturity period is 10 years and yield is 12%.
b) Bond B is 3-years zero coupon bond. Its face value is Rs.100 and currently it can be purchased at Rs.75.
You are required to find out the
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(I) Macaulay duration and Modified duration in both cases.
(II) Also explain what modified duration shows in both cases and which bond has more price volatility risk?
MARKING KEY:
Macaulay duration calculation for Investment in bond “A” & Bond “B”
Marks = 13
Modified Bond duration calculation for Investment decision in bond “A” & Bond “B” Marks = 4
Interpretation for Investment in bond “A” & Bond “B” Marks = 3
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