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Question:

Gender Diversity in Investment Management:

New Research for Practitioners on How to Close the Gender Gap.

ESG integration and the investment management process:

Question 1:
a. Calculating bond prices and depicting yield curve:
 Maturity (years) Market Price of Bond 0.50 100.69 1.00 103.34 1.50 100.80 2.00 102.47 2.50 99.67 3.00 103.55 3.50 103.43 4.00 103.08 4.50 100.25 5.00 100.65 5.50 101.56 6.00 102.00 6.50 100.00 7.00 99.50 7.50 100.47 8.00 101.54 8.50 99.74 9.00 100.68 9.50 100.13 10.00 99.76

The general shape of the yield is approximately, as the above figure. However, the curve is mainly smooth and tends to increase with tenure and decline after some years. The change in bond prices and income tends to alter the YTM of the bond investment.

b. Calculating Yield to maturity:
 Maturity (years) Semi-annually yield 0.50 0.24% 1.00 -0.71% 1.50 0.84% 2.00 1.00% 2.50 1.01% 3.00 1.66% 3.50 1.86% 4.00 1.95% 4.50 1.32% 5.00 1.49% 5.50 1.83% 6.00 2.02% 6.50 1.37% 7.00 1.20% 7.50 1.56% 8.00 2.04% 8.50 1.41% 9.00 1.79% 9.50 1.61% 10.00 1.53%
c. Constructing arbitrage portfolio:
 Bonds T FV Price Coupon rate Rate Duration Weights GSBS18 0.50 100.00 100.69 3.25% 0.24% 0.49 20% GSBE19 1.00 100.00 103.34 5.25% 0.71% 0.99 20% GSBS19 1.50 100.00 100.80 2.75% 0.84% 1.47 20% GSBG20 2.00 100.00 102.47 4.50% 1.00% 1.93 20% Zero coupon bond 2.00 100.00 95.00 - 1.01% 2.00 20% Portfolio Duration 1.38

With the use of equal weights, the portfolio duration calculated for the above arbitrage position is mainly at the levels of 1.38. This mainly helps in understanding the minim tenure which is used in deriving the returns from investment.

Question 2:
a. Relationship between HPR and changes in the YTM:
 Bond Maturity (Years) Face Value Coupon YTM Bond price GSBE47 10.00 100.00 3.00% 1.53% 99.76
 Increase in YTM Year Cash Inflow 0.00% 0.25% 0.50% 0.75% 1.00% 1 3.00 3.4379 3.4391 3.4403 3.4414 3.4426 2 3.00 3.3863 3.3873 3.3883 3.3893 3.3904 3 3.00 3.3354 3.3363 3.3372 3.3380 3.3389 4 3.00 3.2853 3.2860 3.2868 3.2875 3.2882 5 3.00 3.2359 3.2365 3.2371 3.2377 3.2384 6 3.00 3.1873 3.1878 3.1883 3.1887 3.1892 7 3.00 3.1394 3.1398 3.1401 3.1405 3.1408 8 3.00 3.0922 3.0925 3.0927 3.0929 3.0932 9 3.00 3.0458 3.0459 3.0460 3.0461 3.0462 10 103.00 103.0000 103.0000 103.0000 103.0000 103.0000 Total Payment 132.1455 132.1511 132.1567 132.1623 132.1679
 Decrease in YTM Year Cash Inflow 0.00% 0.25% 0.50% 0.75% 1.00% 1 3.00 3.4379 3.4368 3.4356 3.4345 3.4333 2 3.00 3.3863 3.3853 3.3842 3.3832 3.3822 3 3.00 3.3354 3.3345 3.3336 3.3328 3.3319 4 3.00 3.2853 3.2845 3.2838 3.2831 3.2823 5 3.00 3.2359 3.2353 3.2347 3.2341 3.2335 6 3.00 3.1873 3.1868 3.1863 3.1859 3.1854 7 3.00 3.1394 3.1390 3.1387 3.1383 3.1380 8 3.00 3.0922 3.0920 3.0918 3.0915 3.0913 9 3.00 3.0458 3.0457 3.0455 3.0454 3.0453 10 103.00 103.0000 103.0000 103.0000 103.0000 103.0000 Total Payment 132.1455 132.1399 132.1344 132.1288 132.1232

The evaluation of above table mainly helps in understanding the relationship between HPR and YTM. Therefore, any kind of increment or decline in YTM will directly affect the end payment of the bond. Hence, it could be assumed that there is a direct relationship between YTM and HPR (Van, Plantinga and Scholtens 2016).

b. Repeating the process with short sell:
 Bond Maturity (Years) Face Value Coupon YTM Bond price GSBE47 10.00 100.00 3.00% 1.53% 99.76 GSBG25 5.00 100.00 3.25% 1.49% 100.65
 Year GSBE47 GSBG25 Cash Inflow 0.00% 0.25% 0.50% 0.75% 1.00% 1 3 3.25 (0.25) (0.2865) (0.2866) (0.2867) (0.2868) (0.2869) 2 3 3.25 (0.25) (0.2822) (0.2823) (0.2824) (0.2824) (0.2825) 3 3 3.25 (0.25) (0.2780) (0.2780) (0.2781) (0.2782) (0.2782) 4 3 3.25 (0.25) (0.2738) (0.2738) (0.2739) (0.2740) (0.2740) 5 3 103.25 (100.25) (108.1336) (108.1539) (108.1743) (108.1946) (108.2149) 6 3 0 3.00 3.1873 3.1878 3.1883 3.1887 3.1892 7 3 0 3.00 3.1394 3.1398 3.1401 3.1405 3.1408 8 3 0 3.00 3.0922 3.0925 3.0927 3.0929 3.0932 9 3 0 3.00 3.0458 3.0459 3.0460 3.0461 3.0462 10 103.00 0 103.00 103.0000 103.0000 103.0000 103.0000 103.0000 Total Payment 6.2107 6.1912 6.1718 6.1523 6.1328
c. Relationship between HPR and changes in the Coupon rate:
 Bond Maturity (Years) Face Value Coupon YTM Bond price GSBE47 10.00 100.00 0.03 0.02 99.76
 Increase in Coupon rate Year Cash Inflow 0.00% 0.25% 0.50% 0.75% 1.00% 1 3.00 3.4379 3.4465 3.4551 3.4637 3.4723 2 3.00 3.3863 3.3948 3.4032 3.4117 3.4201 3 3.00 3.3354 3.3437 3.3521 3.3604 3.3688 4 3.00 3.2853 3.2935 3.3017 3.3099 3.3181 5 3.00 3.2359 3.2440 3.2521 3.2602 3.2683 6 3.00 3.1873 3.1953 3.2032 3.2112 3.2192 7 3.00 3.1394 3.1473 3.1551 3.1629 3.1708 8 3.00 3.0922 3.1000 3.1077 3.1154 3.1232 9 3.00 3.0458 3.0534 3.0610 3.0686 3.0762 10 3.00 103.0000 103.0075 103.0150 103.0225 103.0300 Total Payment 132.1455 132.2259 132.3063 132.3866 132.4670
 Decrease in Coupon rate Year Cash Inflow 0.00% 0.25% 0.50% 0.75% 1.00% 1 3.00 3.4379 3.4293 3.4208 3.4122 3.4036 2 3.00 3.3863 3.3778 3.3694 3.3609 3.3524 3 3.00 3.3354 3.3271 3.3187 3.3104 3.3020 4 3.00 3.2853 3.2771 3.2689 3.2606 3.2524 5 3.00 3.2359 3.2278 3.2197 3.2116 3.2036 6 3.00 3.1873 3.1793 3.1714 3.1634 3.1554 7 3.00 3.1394 3.1316 3.1237 3.1159 3.1080 8 3.00 3.0922 3.0845 3.0768 3.0690 3.0613 9 3.00 3.0458 3.0382 3.0305 3.0229 3.0153 10 3.00 103.0000 102.9925 102.9850 102.9775 102.9700 Total Payment 132.1455 132.0652 131.9848 131.9044 131.8241
Question 3:
a. Using present yield curve for detecting present value of the liability:
 Liability F(L) 100,000,000 t 1 Yield 2.62% PV(L) 97,451,639.62
b. Calculating weights of the portfolio:
 Bond 1 F 100 c 2.75% t 4.50 C 1.375 P1 90.65
 Bond 2 F 100 c 3.25% t 5.00 C 1.625 P1 100.49
 Cash Flow Time (year) B1 B2 L checking 4.50 101.375 1.625 0 0 5.00 0 101.625 100,000,000 100,000,000

 Bond Portfolio No of bond bond price \$ invest B1 -15773.27734 90.65410927 -1429912.407 B2 984009.8401 100.4883773 98881552.03 B 97451639.62 97451639.62
c. Calculating PV of the liability and weights of the portfolio if yield curve shifts down size by 100 basis points:
 Liability F(L) 100,000,000 t 1 PV(L) 97,476,480.14
 Bond 1 F 100 c 2.75% t 4.50 C 1.375 P1 90.75
 Bond 2 F 100 c 3.25% t 5.00 C 1.625 P1 100.52
 Cash Flow Time (year) B1 B2 L checking 4.50 101.375 1.625 0 0 5.00 0 101.625 100,000,000 100,000,000
 Bond Portfolio No of bond bond price \$ invest B1 -15773.27734 90.75425759 -1431492.075 B2 984009.8401 100.52 98907972.22 B 97,476,480 97,476,480

From the overall evaluation, it could be identified that the hedge was held effectively, where the losses from the bond hedge was minimised from the portfolio weights. This might help in minimising the risk from changing YTM rates. In this context, Fender et al. (2016) stated that with the use of hedging measures investors are able to minimise the risk from investment and maximise their profitability.

References:

Fender, R., Adams, R., Barber, B. and Odean, T., 2016. Gender Diversity in Investment Management: New Research for Practitioners on How to Close the Gender Gap. Research Foundation Briefs, 5(1), pp.1-16.

van Duuren, E., Plantinga, A. and Scholtens, B., 2016. ESG integration and the investment management process: Fundamental investing reinvented. Journal of Business Ethics, 138(3), pp.525-533.

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