1)

Consider the following bond portfolio data:

Bond

Market value of bonds

Duration

WMT

$105,000

14.12 years

TGT

$62,000

3.62 years

i.

Calculate the weights of each bond issue in your portfolio

ii.

What is the duration of your bond

portfolio?

2)

An insurance company must make a payment of $19,487

.17

in 7 years. The interest rate is 10%,

so the present value of the obligation is $10,000. The companys portfolio manager wishes to

fund the obligation using three year zero

-

coupon bonds

and perpetuities paying annual

coupons. How can the manager immunize the obligation?

a.

One year has gone by, and the interest rate remains at 10%. We need to reexamine our

position. Is the position still fully funded? Is it still immunized?

3)

A b

ond has 30 years until maturity, an 8% annual coupon, and YTM of 8%. The modified

duration is 11.26

years and convexity is 212.4. Yields are expected to increase to 10%.

a.

What is the estimated price change using the duration rule?

b.

What is the estimated

price change using the duration with convexity rule?

c.

What is the actual price change

Please show how you got the answers