Question
(a) Calculate the price for each bond and the market value of each bond. (b) Calculate the aggregate market value of the portfolio. (c) Calculate
(a) Calculate the price for each bond and the market value of each bond.
(b) Calculate the aggregate market value of the portfolio.
(c) Calculate the modified duration for each bond.
(d) Calculate the modified duration for the portfolio.
(e) If interest rates increased by 50bp at all maturities, based on the modified duration calculated in (d), by what percentage would the market value of the portfolio change (show increases in price as a positive percentage; decreases as a negative percentage)?
(f) Will the amount calculated in (e) over-estimate or under-estimate the actual prices based on that interest rate change?
(g) If interest rates decreased by 50bp at all maturities, based on the modified duration calculated in (d), by what percentage would the market value of the portfolio change (show increases in price as a positive percentage; decreases as a negative percentage)?
(h) Will the amount calculated in (g) over-estimate or under-estimate the actual prices based on that interest rate change?
(i) How can the estimate based on duration alone be improved?
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Financial Institutions Management A Risk Management Approach
Authors: Marcia Cornett, Patricia McGraw, Anthony Saunders
8th edition
978-0078034800, 78034809, 978-0071051590
