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Bond Math and Portfolios A manager is considering two portfolios: a bullet portfolio and a barbell portfolio. Portfolio A Par Maturity Coupon YTM $9,550,000 5/1/19

Bond Math and Portfolios
A manager is considering two portfolios: a bullet portfolio and a barbell portfolio.
Portfolio A
Par Maturity Coupon YTM
$9,550,000 5/1/19 4.20% 4.47%
$9,450,000 5/1/19 4.75% 4.57%
$20,325,000 5/1/27 6.15% 6.65%
Portfolio B
$19,050,000 11/1/22 5.75% 5.76%
$19,400,000 11/1/22 5.95% 5.80%
(a) Which portfolio is the bullet portfolio?
(b) What are the current prices of the bonds in both portfolios? Use 5/1/17 as the settlement date.
(c) What are the modified durations of the bonds in both portfolio?
(d) What are the durations of both portfolios?
(e) What is the cash yield of each portfolio?
Consider the following scenarios over a one year period (consider settlement is 5/1/18).
CASE IPARALLEL SHIFT IN RATES OF +2.00% PER ANNUM
Assume the yield to maturity on each bond increases by 2.00%
CASE IISTEEPENING OF YIELD CURVE
Assume the yield on the two short bonds in Portfolio A decreases by 2.00%, the yield on
the long bond its unchanged and the yields on the bonds in Portfolio B decrease by 1.00%.
CASE IIIFLATTENING OF YIELD CURVE
Assume the yield on the two short bonds in Portfolio A its unchanged, the yield on
the long bond decreases by 2.00% and the yield on the bonds in Portfolio B decrease by 1.00%.
(e) Calculate the bond prices as of 5/1/18 based on each of the scenarios noted above.
(f) What is the total return of each portfolio expressed as a bond-equivalent yield for each scenario assuming
coupon payments are reinvested at 1.00% per annum, semi-annual compounding.

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