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(10 marks) As a portfolio manager, you are considering your investment allocation to corporate and...

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(10 marks) As a portfolio manager, you are considering your investment allocation to corporate and government bonds with different credit ratings and terms to maturity. Your investment options are summarised in the table below. Yields are expressed as quoted rates. All bonds have a par value of $1000, which is payable at maturity, and coupon payments are made on a semi-annual basis. The first coupon payments are due exactly six months from today. (a) ( 4 marks) If interest rates were to rise by 2% per annum over the course of the next six months, estimate your total return from an investment in BBB-rated corporate debt over the next six months. (b) (3 marks) If the expectations hypothesis was able to explain the term structure seen in the table above, discuss the anticipated direction in short-term bond rates over the next five years. Provide reasoning for your answer. (c) (3 marks) Describe one scenario where the yield on an AA-rated bond might be higher than the yield on an AAA-rated bond of the same maturity

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