1. Expound on credit analysis. Use the concept of zeta score and the details it includes?
Credit analysis is the process of examining the creditability, credit history and financial situation of client or potential borrowers. The banks or moneylenders to ensure safety of their money use this process. At the same time, bond portfolio managers or investors to debt issuing companies on the basis of their credit rating and financial situations also define credit analysis as investigation process that performs. Credit rating is an important instrument that used by lenders when performing credit analysis of a bond issuing institution or individual (Johnson, 2010). The concept of zeta score is useful to identify the risk of bankruptcy …show more content…
In case of convexity, duration is adjusted by selecting a time period in order to determine how bond price changes as the interest change in the market. From this, it can be determined that duration plays a key role in performing the process of convexity on bonds or stocks (Johnson, 2010).
3. a) Define classical immunization. How do we use it in bond portfolio management (BPM)?
Classical immunization can be defined as the process that helps to create a bond portfolio by assuming the rate of return for a specific time period. It is a type of bond investment strategy that used by the investors to minimize the interest rate risk. Under classical immunization, portfolio duration is adjusted in order to match the investors’ time horizon with market interest rates. This process is quite useful to minimize the adverse impact of variation in interest rates on the nest worth of investors (Laopodis, 2012). In bond portfolio management (BPM), classical immunization can be used to establish a portfolio where components to returns including price return and reinvestment return are offset with each other. The motive behind this adjustment is to protect current net worth of bond holders. Apart from this, to minimize reinvestment risk over a specified time period is also an area where classical immunization is used in BPM (Reilly and Brown, …show more content…
It is also needed to determine bond price. Discount Rate: Discount rate is the measure of expected rate of return for the bond holder. Generally, coupon rate or interest rate associated with similar kind of financial securities is used a discount rate when determining bond price. Credit Rating: The credit rating given by the credit rating agencies to bond issuer is also an important determinant of bond price. It is because credit rating has direct impact on the price when a company or government issue bond in the market. Higher credit rating like AAA is the sign of high creditability and value of bond that is enough to attract investors and influence bond prices (Johnson, 2010). Inflation: The rate of inflation is also a factor that influences the bond prices. It is because any change in inflation has direct impact on the interest rates, which ultimately affect the price of financial securities. Due to this reason, inflation is also considered as determinant of bond prices. Reputation of Issuing Institution: The financial situation or reputation of issuing institution also affects the bond prices. For example, U.S. Government Treasury Bond has high price due to having good reputation in the