3. (3 pts) If you are managing an investment-grade bond portfolio and one of you

Question

3. (3 pts) If you are managing an investment-grade bond portfolio and one of your bonds is downgraded from AA to BBB are you required to sell that bond? Explain. 4. In an 8%/year yield environment: (a) (3 pts) What is the price of a 30-year annual-pay bond with a face value of USD 10,000 that pays a fixed coupon of USD 800? (b) (5 pts) What is the dollar duration of a 25-year annual pay floating-rate annuity that is currently paying a coupon of USD 80? (c) (4 pts) What is the credit spread in basis points for a 5-year zero-coupon bond that is selling for 65 percent of par assuming annual compounding?

Explanation / Answer

Answer of Question no. 3.

An investment grade bond AA has low risk and if it is downgraded from AA to BBB; BBB rating bonds are the lowest in the investment grade and have medium risk.

After downgrade of the bond from AA to BBB, it’s better to sell it because –

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