1)Consider the following two-bond portfolio of option-free bonds;[9 Marks]

Bond A

Bond B

Years to maturity

5 years

10 years

Coupon rate

5%

5%

Par value

1000

1000

Yield to maturity

8%

6%

Par amount owned

R3,45 million

R2 million

Market value

R30367.59 (in 000's)

R18528 (in 000's)

Required:

a)Without doing any calculations, which bond would have a higher duration

b)Assuming that Bond A is an option-free bond, calculate the bond's modified duration using Macauly's Duration.

c)Assume that the duration of Bond A and B is 4.2 and 7.5 respectively; determine the duration of the portfolio.