Prepare a report to the client from your Client Bond Portfolio Role Play discussion forum in Week 1 on a proposed fixed-income portfolio (attached).
At this time, you may replace any one or all of the bonds in the portfolio, but you must include at least six bonds and no more than eight bonds in your final portfolio. You may include corporate bonds, asset-backed securities, U.S. Treasury securities, non-sovereign U.S. government bonds (e.g., city or state bonds), or quasi-government bonds. You may apportion the bonds any way you want; however, no single bond can be less than 5% of the portfolio and no single bond can be more than 50% of the portfolio.
As a reminder, here is the client:
The Client: This client is 52-years-old, has no debt, and has significant assets under management with the firm. The client has allocated 2% portion of their assets for individual bond investing. This segment of the portfolio is held in the client’s retirement accounts, and the client expects to retire at age 65. The client has an average risk tolerance.
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In your report,
Define at least three investment objectives for the fixed-income portfolio.
Produce a table identifying the chosen bonds, the primary characteristics of the bonds (including the rating), and the weights of the bonds in the portfolio.
Using the spot rates you used in your Yield Curve and Forecast Report from Week 2, provide an analysis to the client on the arbitrage-free valuation of two bonds in the portfolio (use only non-convertible corporate bonds from the portfolio).
This should be presented as the sum of the present values of expected future values using the benchmark spot rates.
Compare the arbitrage-free valuation to the current market value of the two chosen bonds.
State your conclusion as to whether an arbitrage-free opportunity exists for these two bonds.
Calculate the duration of the portfolio.
Explain any changes to the bond portfolio that occurred in Week 4 or Week 6.
Identify one bond index to use as a benchmark for this portfolio. Be sure to explain how the bond index compares in terms of market value risk and income risk.
Identify characteristics of the bond index that will cause the bond index performance to vary from the client bond portfolio.
Calculate the tracking risk of this bond portfolio versus the chosen index, based on five years of returns for the bonds and the indexes through the current date.
Identify one to three bond index funds that would be appropriate for the client, based on their defined investment objectives.
Recommend one of the following options to the client:
Implement the bond portfolio.
Implement the bond index fund portfolio.