Essay About Government Of Canada Bonds And Year Bonds

Bank of Canada Case
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Summary of the Case:
The manager has four Government of Canada bonds in the portfolio with $10 million in each bond as of today February 20 2012
The manager is following a rate-anticipation strategy with the goal of maximizing gains (minimizing losses) as of the June 1 2012
The manager has come to our team for advice on how to adjust this portion of the portfolio in order to achieve capital gains
Todays Bond Portfolio
Canada 3.500 Jun 01/13
Canada 1.500 Nov 01/13
Canada 4.000 Jun 01/17
Canada 4.000 Jun 01/41
The Bank of Canada and TD Economics have listed the various yield-to-maturity rates for the four bonds listed above
YTM (Feb 16 2012)
YTM (1 Jun 2012)
Canada 3.500 Jun 01/13
Canada 1.500 Nov 01/13
Canada 4.000 Jun 01/17
Canada 4.000 Jun 01/41
YTM Today
Present Value
FC YTM June
Value as of June
% Change
3.5 Jun/2013
$1,02,98,400
$1,02,36,016
-0.61%
1.5 Nov/2013
$1,00,67,668
$99,98,600
-0.69%
4.0 Jun/2017
$1,13,65,925
$1,11,74,363
-1.69%
4.0 Jun/2041
$1,31,70,225
$1,25,42,250
-4.77%
Total
$4,49,02,218
Total
$4,39,51,229
-2.12%
Assumptions:
Total Face Value of investment in each bond = CAD 10 million
Coupon Payments assumed to be semi annual
YTM for June 2012 taken as mentioned in (A)
PV of Bond = PV of annuity + PV of lump sum
The above equation was used to compute the Present Value of the portfolio.
C & D)
Current Economic Environment in Canada:
During 2010, Canadas economy grew only 3%, due to decreased global demand and a highly valued Canadian dollar
Inflation rate has been increasing
1.8% (2010 est.)
0.3% (2009 est.)
Yield to Maturity is in an upward trend – Please refer to page 7 (Appendix)
Strategies:
General Rationale:
As per our calculations of bond value in Feb and June 2012:
For the 30 Year bonds, the percentage change is -4.77%. Thus, this bond carries a high risk and low net present value as of June 2012.
Short Term bonds have lower percentage changes and thus carry a lower risk and improved net present values.
Strategy 1:
Divest from Canada 4.000 June 01, 2041 & invest the proceedings to Canada 4.000 June 01, 2017.
Divest from Canada 1.50 Nov. 01, 2013 & invest the proceedings to Canada 3.50 June 01, 2013.
Rationale:
The 5-year bond has a lower % change due to its high coupon rate.
By combining the 1-year bonds, we are retaining the cash flows while improving the portfolio value.
Strategy 1
YTM Today
Present Value
FC YTM June
Value as of June
% Change
3.5 Jun/2013
$2,03,66,068
$2,02,42,698
-0.61%
1.5 Nov/2013
0.00%
4.0 Jun/2017