Question
Consider the following bonds: Bond A Bond B Bond C Par Coupon rate YTM Time to maturity $1,000 3% 3% 3years $1,000 6% 8% 4
Consider the following bonds:
Bond A | Bond B | Bond C | |
Par Coupon rate YTM Time to maturity | $1,000 3% 3% 3years | $1,000 6% 8% 4 years | $1,000 0% 10% 10 years |
a. Calculate the duration for each bond, by hand (10 points). Based on its duration, which bond has the highest level of interest rate risk? YOU MUST CALCULATE ONE BOND PRICE USING THE BOND PRICING FORMULA!
b. Calculate the duration of a portfolio containing these 3 bonds in equal weights.
c. Assume interest rates increase by one percentage point. Using the portfolio’s duration, approximately how much will this portfolio change in value?
Step by Step Solution
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There are 3 Steps involved in it
Step: 1
a To calculate the duration of each bond we can use the following formula Duration CF11r 2CF21r2 nCF...
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Step: 2
Step: 3
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Income Tax Fundamentals 2013
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill
31st Edition
1111972516, 978-1285586618, 1285586611, 978-1285613109, 978-1111972516
