An amount of 100,000 is required in 3.25 years time. Interest rates are currently 8 per cent and a company wishes to invest an amount in bonds, which will grow to 100,000 at the time of maturity. Two bonds are available (see Figure 5.13).

■ Calculate the price, duration and modified duration and estimate the change in value if interest rates rise by 1 per cent.
■ Use Goal Seek to find out what proportion of each bond the company should invest in. The formula is:
Portfolio duration = (Duration A * Percentage A) + (Duration B * Percentage B)
■ Calculate the present value of 100,000 in 3.25 years at the input rate of 8 per cent as this is the amount to be invested now.
■ Calculate the proportion of the present value to be invested in each bond.
■ Divide the amount by the price to find out how many bonds are required.

Transcribed Image Text:

4 5 Bond B Settlement Date 7 Maturity Date 8 Coupon 9 Coupons per Annum 10 Yield to Maturity 11 Redemption 12 Basis Exercise inputs A 31/12/2008 B 31/12/2008 30/06/2012 31/05/2013 31/12/2008 30/03/2012 10.00 3.00 1.00 1.00 8.00 8.00 100.00 100.00 8.00 1.00 8.00 100,000.00 D Figure 5.13