Investment Management

Case 3
Submitted by:
Harmanjit Singh Dhillon
Jaspreet Raghu
Saksham Diwan
Shreshth Chugh
Minal Singla
Financial Advisor’s Investment Case-
High-Yield Securities and Relative Risk
• Stephanie Waldron is an aggressive individual and is both willing and
able to bear substantial risk in order to earn a higher return.
• She prefers to select specific assets and her account’s value is more
than $200,000
• High- yield debt instruments can be good alternative to stocks
• High-risk and high-return in tandem with Stephanie’s investment
philosophy.
• She wants to know the ranking of each bond from low to high
volatility. She wants to compare the bonds' price volatility with the
'AAA' rated bonds with the same terms to maturity.
Given:
Bond issued by Coupon Maturity date Price Yield to maturity
company (years) ($)
A 10% 10 900 11.752%
B 15% 15 1200 12.055%
C 0% 7 487 10.825%
D 7% 10 772 10.847%
E 6.5% 10 900 7.990%
F 10.5% 15 1200 8.143%
G 0% 7 587 7.908%
H 4.5% 10 772 7.879%
Q. Bond Ranking of High yield bonds from the
least to the most price volatile
BONDS VOLATILITY
A 5.92
C 6.33
D 6.49
B 6.56

Macaulay duration = Sum of (PV)(CF) * T / market price of the bond.

To find the modified duration, all an investor needs to do is take the Macaulay
duration and divide it by 1 + (yield-to-maturity / number of coupon periods per
year).
Q. Comparison of High yield bonds to Triple A
Rated bonds
Bond issued by company Price Volatility
A 5.92
B 6.56
C 6.33
D 6.49
E 6.94
F 8.11
G 6.52
H 7.37
Q. Comparison of High yield bonds to Triple A
Rated bonds
By calculating the Modified duration comparing the bonds to compared
according to the case we can see that volatility of A less than E, B less
than F, C less than G, D less than G
Q. Interest rates raised by 3 percent so calculating
the new price of each of the eight bonds
accordingly.
Bond issued by company Old Price (in $) New Price (in $)
A 811 676
B 14 1196
C 237 196
D 595 494
E 809 661
F 1439 1144
G 344 284
H 596 480
Q. What do these new prices suggest about the
price volatility of high-yield versus high-quality
bonds?
Bond issued by company Price Volatility
A 5.42
B 5.79
C 6.19
D 6.03
E 6.47
F 7.27
G 6.36
H 7.01
Q. What do these new prices suggest about the
price volatility of high-yield compared to high-
quality bonds?
By calculating the Modified duration of each bond according to the
increased 3 percent interest and comparing the bonds to compared
according to the case we can see that volatility of A less than E, B less
than F, C less than G, D less than G. that is still high-yield bonds are
having less volatility than the higher quality(rating).
Q. Which bonds' prices were more volatile?
The high-quality bonds are more price volatile than high-yield bonds as
per the analysis.
After the increase of 3% in interest rates, the decline in the bond prices
of high quality bonds is more as compared to the high yield bonds. So
the prices of high quality bond is more volatile than the high yield ones
Q. If two bonds with the same term to maturity sell for
the same price, which bond may subject the investor
to more interest rate risk?
the bond with higher quality between the two may subject the
investor to more interest rate risk.
End.