An investor is planning a $100 million short-term investment and is going to choose among two different portfolios. This investor is seriously worried about interest rate volatility in the market. Compute the duration of the portfolios. Which one is more adequate for the investors objective? Assume today is May 15, 2000, which means you may use the duration for bonds in portfolios shown as follows: Portfolio A 40% invested in 4 1/4-year bonds paying 5% semiannually 25% invested in 7-year bonds paying 2.5% semiannually 20% invested in 1 3/4-year floating rate bonds with a 30 basis point spread, paying semiannually 10% invested in 1-year zero coupon bonds 5% invested in 2-year bonds paying 3% quarterly

Portfolio A 40% invested in 4 1/4-year bonds paying 5% semiannually 25% invested in 7-year bonds paying 2.5% semiannually 20% invested in 1 3/4-year floating rate bonds with a 30 basis point spread, paying semiannually 10% invested in 1-year zero coupon bonds 5% invested in 2-year bonds paying 3% quarterly Table. Duration of bonds in Portfolio A on March 15, 2000 Security Duration 4.5yr @ 5% semi 3.8660 7yr @ 2.5% semi 6.4049 1.75 fl + 30bps semi 0.2540 1yr zero 1.0000 2yr @ 3% quart 1.9530 Portfolio B 40% invested in 7-year bonds paying 10% semiannually 25% invested in 4 1/4-year bonds paying 3% quarterly 20% invested in 90-day zero coupon bonds 10% invested in 2-year floating rate bonds with zero spread, paying semiannually 5% invested in 1 1/2-year bonds paying 6% semiannually Table. Duration of bonds in Portfolio B on March 15, 2000 Security Duration 7yr @ 10% semi 5.4262 4.25yr @ 3% quart 3.9838 90 day zero 0.2500 2yr fl semi 0.5000 1.5yr @ 6% semi 1.4564