a) What is the yield to maturity for the T Bill? b) Calculate the Macaulay duration of each of the securities, and the Macaulay duration of the portfolio? c) If your friend has an investment horizon of 3 years and wants to sell the portfolio at that time to use the principal + interest, what recommendations would you make regarding the composition of the portfolio? d) Using Excel Solver show how much would need to be invested in each instrument to obtain a portfolio Macaulay duration of 3.25 years. There are the following constraints. 1 The total investment should not change. 2 The same amount needs to be held in cash 3 A total of $100,000 market value needs to be invested in the T Bill and $20,000 in the Aa Bond. 4 Yield is maximized. NB Work on numbers in the above portfolio table.

e) Is default risk a major concern for this portfolio? f) The Baa rated bond has just been re-rated by one of the rating agencies and this has the impact of reducing its yield to maturity by 5 basis points. If at the same time there is a general change in interest rates so that yields fall across the whole of the yield curve by 20 basis points (including the rerated bond), what is the new value of the portfolio?

My portfolio Security US Treasury Bill Corporate Bond Rated Aa Corporate Bond Rated B Corporate Bond Rated Baa Cash Face Value $20,000 $67,500 $112,500 $37,500 $7,500 Market Term Value (years) $19,192 1 $60,359.2 8 $89,968.9 10 $39,753.2 5 Coupon Yield to maturity paid Annually 0% 10% 12.14% 12% 16.17% 15% 13.28%