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Calculation of Leveraged Bond Portfolio Returns $5,000,000 $2,000,000 $3,000,000 Market Value of…

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Calculation of Leveraged Bond Portfolio Returns $5,000,000 $2,000,000 $3,000,000 Market Value of Bonds = % Equity in Bonds = % Borrowed Funds = Annual Cost to Borrow Funds = 30 Day Cost to Borrow Funds = Return on Funds Invested = 40% 60% 0.046 0.003833 0.50% Return on Equity Bonds = Return on Borrowed Bonds = 0.50% 0.1167% Return on Bond Portfolio = 0.6750% Required Use the above spreadsheet to solve the following problem. Suppose a portfolio manager creates a bond porfolio of $10 million. The portfolio is financed 30% with 30 day repurchase agreements. The repurchase rate agreement has an annyual stated rate of 5.4%. After 30 days the bond portfolio manager sells the bond portfolio which has increased in value by 0.8 percent (0.008). If no coupons were received answer the following questions: A. What is the 30-day rate of return on the equity and borrowed components of the portfolio? B. What is the 30-day bond portfolio rate of return? C. What would the 30-day portfolio rate of return be if the bonds decreased 0.4 percent (-0.004) in value instead of increasing 0.8 percent? D. What is the effect of the use of leverage on the portfolio rate of returns?

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