Investment Portfolio Implementation and Management Assignment

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Business Finance


Deliverable Length: 400-600 words
Part 1
Clark Dale is one of the investment portfolio managers at ACG in charge of managing a $15 million Treasury bond portfolio account for a trust fund. He is considering the use of Treasury bond futures in an attempt to hedge the account portfolio. He consults with you with regard to the best plan of action for investment and portfolio management of this account. How would you counsel Clark?
1. Is a hedging strategy the best plan of action?
o Explain why you think Clark is considering this strategy.
o What is the relationship between bond prices and interest rate fluctuations?
2. Should he consider a long or short hedge strategy?
3. Explain your reasoning behind your suggestion. What will the return be?

Part 2
Deliverable Length: 1000-1200 words
Beth Anaheim is a 70-year-old retiree who has been referred to ACG by a current ACG client. Beth's main investment objectives are safety of principal and current income. Her retirement income sources include social security, rental income from a commercial investment property managed by a professional property management firm, and a $500,000 investment portfolio consisting of several utility company stocks and corporate bonds. Beth is currently in the 30% combined federal and state marginal tax rate. Beth is considering an investment in one of the following bonds:
* DES Corporate Bond: A-Rated, 9% coupon rate, maturing in 7 years (recommended by a friend).
* FGR Municipal Bond: AAA-rated, 7% coupon, maturing in 7 years (recommended by her ACG investment advisor).
Using the taxable equivalent yield concept, you are to help the ACG advisor explain to Beth why the FGR bond investment could offer a higher yield and lower risk. Make sure that you present the information in as simple a manner as possible without leaving out any pertinent information.

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Explanation & Answer


Running Head: Hedging


Hedging(Part 1)

Name of Student
Institutional Affiliation



I agree that hedging is the best strategy. It against the interest rate risks. Can increase in
value when the bond prices fall intending to offset the value decline. IN this case, it will help to
cushion the trust fund against the interest rate risk. The reason why Clark Dale chooses this
strategy of hedging is that the treasury bonds have fixed income security that is prone to the
change of interest as a result of the ever-changing global economy. Additionally, he wants to
hedge with the use of Treasury bond futures because they are highly standardized to make sure
there is consistency equality. They are also cheap as they attract a commission lower brokerage
and one is required it lay the margin amount.
The primary relationship between bonds and interest rate fluctuations us that when there
is an issuance of bonds, they tend to carry the coupon rates close to the present market interest
rate. They both have an inverse relationship which means that when one goes up the other goes
down. This depicts that when market interest rates increase, the bond reduces thus attracting
fewer customers. In case of the interest rate increases, the bond prices will reduce which
demands their sale at a discount to make the investor earn the current market interest rate or vice
I believe that Clark should consider using this strategy because it will cushion against the
possibilities of a decline in bond rice in the future. In any case, the underlying price of the
treasury falls in the future, the reduced revenue from the sale of bonds will be offset by the value
gained in the short futures. This means that he should use the short hedge strategy for effective
results. This is because I believe the amount of return realized will be the sale price of the bond
after the sale with an addition of the amount received by selling of futures contracts. Hedging is
also a time saver s...

Very useful material for studying!


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