Financial Management Activity 3

This activity has two parts, please answer both.

1. Two bonds, A and B, have the same credit rating, the same par value, and the same coupon

rate. Bond A has 30 years to maturity and bond B has 5 years to maturity. Please

demonstrate your understanding of interest rate risk by answering the following questions


a. Discuss which bond will trade at a higher price in the market.

b. Discuss what happens to the market price of each bond if the interest rates in the

economy go up.

c. Which bond would have a higher percentage price change if interest rates go up?

d. Please substantiate your argument with numerical examples.

e. As a bond investor, if you expect a slowdown in the economy over the next 12

months, what would be your investment strategy?

2. Familiarity with random variables is essential to understand the basics of portfolio theory.

Given that the CLA 2 assignment is about portfolio formation, you need to strengthen

your skills in dealing with random variables. Please review and explain the significance of

basic concepts about random variables, namely, the mean, the variance, the standard

deviation, and the correlation.

Provide your explanations and definitions in detail and be precise. Comment on your findings.

Provide references for content when necessary. Provide your work in detail and explain in your o wn words
Please add the reference.
Pdf or word docx please!

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