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Assume that you recently graduated and landed a job as a financial planner with Cicero Services, an investment advisory company.
Assume that you recently graduated and landed a job as a financial planner with CiceroServices, an investment advisory company. Your first client recently inherited some assetsand has asked you to evaluate them. The client presently owns a bond portfolio with $1million invested in zero coupon Treasury bonds that mature in 10 years.40 The client alsohas $2 million invested in the stock of Blandy, Inc., a company that produces meat-and-potatoes frozen dinners. Blandy’s slogan is “Solid food for shaky times.”Unfortunately, Congress and the President are engaged in an acrimonious dispute overthe budget and the debt ceiling. The outcome of the dispute, which will not be resolveduntil the end of the year, will have a big impact on interest rates one year from now. Yourfirst task is to determine the risk of the client’s bond portfolio. After consulting with theeconomists at your firm, you have specified five possible scenarios for the resolution of thedispute at the end of the year. For each scenario, you have estimated the probability of thescenario occurring and the impact on interest rates and bond prices if the scenario occurs.Given this information, you have calculated the rate of return on 10-year zero coupon foreach scenario. The probabilities and returns are shown below:Scenario Probability ofScenario