A portfolio can be mapped to the following two zero-coupon bonds:

Bond	Yield	Maturity in Years	Annual Std. Dev. of Yield	Exposure
A	5%	2	0.50%	$25
B	3%	13	1.20%	$75

The correlation between the two returns is 0.25. Changes of the yields are assumed to follow normal distributions with mean of 0 and the standard deviations shown above. What is the diversified and undiversified 10-day VaR (at 95% level) of this portfolio? Hint: The first step is to calculate the VaR of each bond. It could be estimated by a delta-normal approach, where the delta (sensitivity to the underlying risk factor) should be the modified duration of each bond. The modified duration of a zero-coupon bond is calculated as:

D*=Maturity1+Yield

The VaR of each bond will be VaRD**|z95%|*10-day*Exposure .