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MGT411 - Money & Banking

Graded Discussion Board

Dec 5-10, 2013

Total Marks 30
 


 “RETURN ON BONDS & SOURCES OF BOND RISK”

 

LEARNING OBJECTIVES:

 

Money & Banking students will be enabled to understand:

 

  • What are the different sources of bond risk and their impact on bonds’ value?

 

  • The behavior and strategy of an investor (bondholder), to manage & deal with the risk of a bond according his needs and market conditions.

 

Case:

Luxurious life, who does not wish to live. Nowadays, a good education is essential for such a wishful life. Getting quality education has become a dream that can hardly come true for lower middle class which strives tooth and nail. They put their lives and even their hard earned savings at risk to secure better future for themselves and their coming generations.

Mr. Amjad recently completed his graduation from a local university and now plans to pursue higher studies abroad, Australia. Getting admission and   study visa may take thirteen to fifteen months. He has sufficient money that can only help him secure admission, get visa and travel to desired location but cannot pay for accommodation, food and other expenses; therefore requires more money. An idea knocked him to invest the money in hand in some corporate bonds that may earn him high profits(which he actually needs); would sell these bonds without any loss upon the confirmation of admission to pay dues (admission charges, semester charges, travel, boarding and messing) and start working for making his dreams come true.

Requirement:

1.      Suppose Mr. Amjad invests money in 12% corporate bonds, after a month, government changes its policy regarding interest rate. How can Mr. Amjad incur loss due to such change?                                                   

2.      Does the above change (in part 1) link with the liquidity of a bond? Support your answer with logical reasoning.                                          

3.      After two months, a banker approaches Mr. Amjad and attempts to convince him to move his money from bonds and invest in bank’s “Mahana Certificates (MCs)”, he claims that MCs are 100% secure and fully insured by the government. How would Mr. Amjad respond?                          

    

Note: Complete your comment within 250 words

Important Instructions:

 

1.   Your discussion must be based on logical facts.

2.   The discussion board will remain open for 4 working days.

3.   Do not copy or exchange your answer with other students.  Two identical / copied comments will be marked Zero (0) and may damage your grade in the course.

4.   Obnoxious or ignoble answer should be strictly avoided.

5.   Questions / queries related to the content of the discussion board, which may be posted by the students on MDB or via e-mail, will not be replied till the due date of discussion board is over.

v  For detailed instructions please see the discussion board announcement

 

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Replies to This Discussion

Please mjay koe just ye bta dey k first question ka liquidity bond sy koe link hay ya nhe?

Because i am no understanding from just the definitions of liquidity of bond......

Please help me

Please give me answer of my question.....

plzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzZ

nahi usman liquidity se link nahi hay... is man just apko btana hai k istrha k change se Mr.amjad ko kasa loss ho ga  jiska ans mujhe bhi nai pta 

thanks

lekin fatima usne ye to kahin nai pucha k knsa bond ho ga.. uska question to ye hai k Mr.amjad ko loss ho sakta hai kis trha ??? i think ye question hai what u sya???

agree with hira

yar us ka zero coupon bond hai means k end pe sell kery ga tu interest us ka profit ha jab interest he kam ho ga to profit kam he ho ga na :p

yaha woh keh raha coporate bond k rate change howa ab jo loss incur howa us us say kasy bacha jay tu bonds ma u should use here zero copun bond.

any solution plzzzzzzzzzzzzzzz, i think no loss its a trik q?

Liquidity Risk.

There may not be a continuous secondary market for a bond, thus leaving an investor with difficulty in selling at, or even near to, a fair price. This particular risk could become more severe in developing markets, where a large amount of junk bonds belong, such as China, Vietnam, Indonesia, etc

ye or cheez ha bhai liquidity of bond or cheez ha 

nahi fatima  

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