The Bond is Right - Solution

You are considering making an investment in the fixed income market. You have
obtained the descriptions of a number of issues from your Bloomberg terminal. Using
the information attached assess which bonds you would choose under various criteria.

Which bond would you invest in if you:

1. Wanted the best possible credit quality?

- The US and UK government bonds would be regarded in the market as have the
best quality
- The International Bank for Reconstruction and Development and General Electric
would also be good choices.

2. Thought interest rates were going to rise?

- When interest rates and yields rise, generally bond prices fall
- This is because their fixed coupons look less attractive as rates rise
- The coupon on a floating rate note rises with interest rates, and so the drop in
price of an FRN is less pronounced
- Jet Blue LIBOR + 23bp, would therefore be a good choice.

3. Wanted to participate in the equity of a company?

- Holders of convertible debt can receive a fixed number of shares in lieu of par for
their bonds
- Therefore, the AAL bond is a good choice.

4. Wanted exposure to the British corporate debt market and a strengthening Euro?
- Tesco’s is a British company and it has raised debt in Euros
- The debt was most likely raised to finance their expansion into Europe.

5. Wanted the highest possible income?

- The coupon on the bond provides the income
- By dividing the annual coupon by the bond’s price you can calculate the
income yield
- The yield for Ford is 7.0% (7.4/106.44)
- The yield for Motorola is 6.6% (5.22/79)
- The yield for Lloyds is 12.2% (15/123.178) but this is a CoCo bond.

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6. Wanted to protect the purchasing power of your investment?
- To protect the purchasing power of your investment you need a bond that is linked
to an inflation index
- The UK Indexed Linked note would be a good choice.

7. Wanted to make the best possible investment?

- Of course this depends on your risk appetite and the market price of the securities
relative to your view of the credit quality of the issuer
- All the bonds are contenders as long as you can defend your choice.

8. Which three bonds would you choose to build a portfolio and why?
There is no wrong answer to this question; The two possible solutions are:
- Choose three bonds that will provide good diversification, perhaps a range of
currencies, issuers and markets
- A core and satellite strategy with the majority of the investment in one of
the higher quality bonds, plus some small investments in the more riskier bonds
with high yields

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