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As a portfolio manager, you have a portfolio with one liability of a single payment 5...

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Finance

As a portfolio manager, you have a portfolio with one liabilityof a single payment 5 years from now of $7,500 and five bonds,which mature 10 years from now at par ($1,000 each) with annualinterest payments of $100 each. Assuming that the bond sold at par,and the nominal interest rate remains at about 10 percent, youshould be able to make the balloon payment with the interest on thebonds for 5 years ($500 times 5 = $2,500, not including theinterest from receiving the interest) plus redeeming the bonds($1,000 times 5 = $5,000). Your calculation are simple, and yousleep in blissful ignorance. What is the fallacy in thiscalculation?

Answer & Explanation Solved by verified expert
3.6 Ratings (360 Votes)
Answer Liability on bonds The interest on any bond are paid periodically hence liability arises for paying interest periodically here annually The redemption value liability on bond is created on expiry of    See Answer
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