Analysis of the Corporate Bonds

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

Today’s 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

A)

The Bank of Canada and TD Economics have listed the various yield-to-maturity rates for the four bonds listed above

(http://www.bankofcanada.ca/rates/interest-rates/canadian-bonds/?page_moved=1)

(http:// www.td.com/document/PDF/economics/special/ds_jan12.pdf )

YTM (Feb 16 2012) YTM (1 Jun 2012)

Canada 3.500 Jun 01/13 1.09 1.12

Canada 1.500 Nov 01/13 1.09 1.51

Canada 4.000 Jun 01/17 1.30 1.55

Canada 4.000 Jun 01/41 2.5 2.75

B)

Bond YTM Today Present Value FC YTM June Value as of June % Change

3.5 Jun/2013 1.09 $1,02,98,400 1.12 $1,02,36,016 -0.61%

1.5 Nov/2013 1.09 $1,00,67,668 1.51 $99,98,600 -0.69%

4.0 Jun/2017 1.3 $1,13,65,925 1.55 $1,11,74,363 -1.69%

4.0 Jun/2041 2.5 $1,31,70,225 2.75 $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