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Data on Bond Yields

12.

Using the following data on bond yields

This Year

Last Year

 

Yield on top-rated corporate bonds

4.6

%

7.6

%

Yield on intermediate-grade corporate bonds

6.6

%

9.6

%

Calculate the confidence index this year and last year.

Ans; This year Confidence index  =  4.6%/6.6%. = 0.6969

Last year Confidence index  = 7.6%/9.6%   = 0.7916

You are evaluating a closed-end mutual fund and see that its price is different from its net asset value (NAV).

The fund has an expense ratio (ε) of 4.95% and a dividend yield (δ) of 4.00%. The fund has experienced a risk-adjusted abnormal return (α) of 6.05%.

By what amount (premium or discount) is the fund likely to trade relative to its NAV?

Use the equation:

(α−ϵ) / (δ + ϵ − α)

Ans; (6.05% - 4.95%) / (4%+4.95%-6.05%) = (1.10% / 2.90%) = 0.3793

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