1a

A bond portfolio has a current market value of $500,000,000. The average portfolio duration is 5 years. Current rates are 4%. Rates are expected to fall0.5% over the next 12 months. Use the duration value to estimate the expected change in market value of the portfolio over the next 12 months. Assume annual compounding.

Select one:

a.+$12,019,230.77

b.-$120,192,307.69

c.-$12,019,230.77

d.+$120,192,307.69

1b

The central bank increases money supply growth. The liquidity effect initially impacts the interest rate. Following this, the income, price level and expected-inflation effects begin to affect the interest rate and over the course of 12 months these effects outweigh the liquidity effect. What does this imply about the path of interest rates over the next 12 months? Explain

1c

You own a 8-year zero coupon bond. The market rate is currently 6.2%, but it is forecast to fall to 5.2%. Estimate the percentage price change that you expect for the bond that you hold.

Select one:

a.+7.60%

b.-7.60%

c.-7.53%

d.+7.53%