Investment Challenge assignment for intermediate Investments college class.?
FIN 4210 Investment Challenge 4 (IC-4):
Bond Portfolio Management Article/Exercise (50 points total)
Instructions: IC-4 is designed to prepare you for ISM-5 and to provide practice using bond portfolio
management techniques. IC-4 may be completed individually or with one partner. If working with a
partner, only one IC-4 needs to be turned in for me to grade.
Part A: Article Critique (10 points) – Find an internet article in The Wall Street Journal or some other
business or popular press publication (Business Week, Fortune, Forbes, see syllabus for more options)
that describes an investment strategy with regards to fixed income markets. You may wish to use the
UTC library database to search for periodicals. If you are adventurous, you could also look on the Web
for pages that offer investment advice. Using your understanding of the fundamentals of bond portfolio
strategies, critique the article in a one-page memo. Organize the memo as follows:
a. Summarize the investment strategy.
b. Briefly discuss the relevant principles from the course that apply to the article. You should be
specific with regards to bond portfolio strategies. For example, your investment strategy may
discuss bullets, barbells, or ladders; if so, discuss the specifics of the strategy including at least
one example (using actual bonds).
c. Discuss whether the strategy is consistent with the principles from the course.
d. Who is offering the advice? Do you think they have a hidden motive?
e. Would you recommend the strategy to a family member? Why or why not?
f. Attach a copy of the article to your memo .
Select the article carefully. Your grade will depend on how well you apply the principles you?ve learned in
class to a critique of the article. The article should be fairly in-depth and should discuss issues that we
have talked about in class. A poorly chosen article will negatively affect your grade. A well-chosen article
will make the assignment straight-forward.
Part B: Corporate Bond Exercise (20 points) ? Assume that you have to invest $100,000 into a
corporate-bond portfolio for your client, UC Foundation. Using any online resource (e.g.
www.tradebonds.com), pick at least 5 corporate bonds of investment-grade quality and 5 corporate
bonds of high-yield quality (i.e. at least 10 total corporate bonds for the portfolio).
a. Construct the portfolio using a ladder strategy. Explain your bond selections according to their
appeal as investments. (5 points)
b. What is the duration of your ladder portfolio? What does this mean? Explain. (2 points)
c. What is the estimated average annual income from your ladder portfolio? (2 points)
d. Construct the portfolio using a barbell strategy. Explain your selections according to their appeal
as investments. (5 points)
e. What is the duration of your barbell portfolio? What does the mean? Explain. (2 points)
f. When is the highest & lowest estimated annual income from your barbell portfolio? (2 points)
g. Make a case for both strategies for your client, but recommend only one. Explain your
reasoning. (2 points)
Part C: Treasury Bond Exercise (5 points) ? Go to the website www.tradebonds.com. Determine the
yield spread between:
a. Twenty-year Treasury bonds and ten-year Treasury bonds.
b. Twenty-year Treasury bonds and one-year T-bills.
c. Five-year AAA corporate bonds and five-year BBB corporate bonds.
Using any online bond screener (e.g. the S&P NetAdvantage online service bond screener option),
determine how many AAA-rated bonds exist that are from a company NOT involved in any aspect of
financial services, investments, or banking.
Part D: Bond Rating Exercise (5 points) ? Using yields of maturities listed on any online information
source (e.g. recent copy of the S&P Bond Guide), prepare (i.e. use Excel or draw) a yield curve out to
twenty years for:
a. AAA-rated bonds
b. AA-rated bonds
c. A-rated bonds
d. BBB-rated bonds
e. BB-rated bonds
f. B-rated bonds
g. Could you find all of them? If not, make an educated guess. Which was the hardest to find?
Part E: Yield Curve Exercise (5 points) ? Use the dynamic yield curve toot at www.stockcharts.com or
some other website to identify a period when the yield curve was:
a. unusually steep.
b. relatively flat.
c. inverted (with some short-term rates higher than longer-term ones).
Part F: Confidence Index Exercise (5 points) ? The confidence index is the ratio of the yield on AAA
bonds to the yield on BBB bonds. Good sources for yield data include www.bondsonline.com,
www.bloomberg.com, and www.online.wsj.com. The confidence index is a measure of market
sentiment. Calculate this measure for:
a. one-year maturities.
b. five-year maturities.
c. ten-year maturities.
Suppose this measure is gradually rising. Explain why this might be viewed as a positive leading indicator
of the economy.