Explanation:

B is correct. The bond's net return factors in its price change, coupons paid, and financing costs over the period; the sum of these is divided by the opening price.

The coupon received on September 30 must be grown at its reinvestment rate to determine its value as of December 31:

$`$ 27`,500 \times (1 + 3.0%) = 28,325

Financing cost is: $`$1`,062,500 \times 3.5\% = 37,187.50

Therefore, the net return from July 1 to December 31 is calculated as:

\frac{1,048,200 - 1,062,500 + 27,500 + 28,325 - 37,187.50}{1,062,500} = 0.4082\%

To annualize using semi-annual compounding:

(1 + 0.4082\%)^2 - 1 = 0.82\%

Question-25: A performance analyst at an asset management firm is measuring the returns of individual positions in a fixed-income portfolio. Details regarding the performance of a specific bond over a recent 6-month period are as follows:

Purchase price on July 1: BRL 1,062,500

Coupon received on September 30: BRL 27,500

Coupon received on December 31: BRL 27,500

Closing price on December 31: BRL 1,048,200

Total financing cost from July 1 to December 31: 3.5%

Return on reinvested funds from September 30 to December 31: 3.0%

What was the net return earned on the bond over the period from July 1 through December 31, annualized using semi-annual compounding?

Other

Community

−2.26%

0.82%

3.91%

7.82%

Financial Risk Manager Part 1

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