Question
Consider a bond portfolio, which consists of 1,000 units each of three bonds: Bond A with annual coupons, a coupon rate of 7%, maturity of
Consider a bond portfolio, which consists of 1,000 units each of three bonds:
Bond A with annual coupons, a coupon rate of 7%, maturity of 6 years, and YTM of 6.5%.
Bond B, a perpetuity with coupon rate of 7.5%, and YTM of 6.0%.
Bond C, a zero coupon bond with YTM of 6.9% and maturity of 5 year.
a. Calculate the total current market value of the portfolio.
b. Calculate the modified duration of the portfolio
c. What would be the new market value of the portfolio if interest rates were to decrease by 50 basis points across board?(use modified duration approach)
d. Suggest a strategy the portfolio manager can use to mitigate the portfolios exposure to the yield increase.
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