Elliot Karlin is a 35-year-old bank executive who has just inherited a large sum of money. Having spent several years in the bank's investments department, he's well aware of the concept of duration and decides to apply it to his bond portfolio. In particular, Elliot intends to use $1 million of his inheritance to purchase four U.S. Treasury bonds:

QUESTIONS: thumbs up for correct answers

A.

An 8.67%, 13-year bond that's priced at $1,099.60 to yield 7.46%.

The duration of this bond is (blank) years ?

A 7.849 % 15-year bond that's priced at $ 1026.57 to yield 7.55%.

The duration of this bond is (blank) years ?

A 20-year stripped Treasury (zero coupon) that's priced at $ 199.67 to yield 8.22%.

The duration of this bond is (blank) years ?

A 24-year,7.49 % bond that's priced at $ 960.33 to yield 7.86%.

The duration of this bond is (blank) years ?

b. Find the duration of the whole bond portfolio if Elliot puts $ 250,000 into each of the 4 U.S. Treasury bonds.

The duration of this portfolio is (blank) years ?

C. Find the duration of the portfolio if Elliot puts $330,000 each into bonds 1 and 3 and $170,000 each into bonds 2 and 4.

The duration of this portfolio is (blank) years ?

D. Which portfolio - the portfolio in part b or the portfolio in part cshould Elliot select if he thinks rates are about to head up and he wants to avoid as much price volatility aspossible?(Choose the best answer below.)

a. He should invest in either portfolio. The portfolio in part c has a higher duration than the portfolio part b If rates are about to rise, then it is equally safe to invest in either portfolio, because both portfolios would be equally price volatile

b. He should invest in the portfolio in part c. The portfolio in part c has a higher duration than the portfolio in part b If rates are about to rise, then it is riskier to invest in the portfolio in part b because it would be more price volatile than the other portfolio.

c. He should invest in the portfolio in part b. The portfolio in part c has a higher duration than the portfolio in part b If rates are about to rise, then it is safer to invest in the portfolio in part b because it would be less price volatile than the other portfolio.

d. He should invest in the portfolio in part c. The portfolio in part b has a higher duration than the portfolio in part c If rates are about to rise, then it is safer to invest in the portfolio in part b because it would be less price volatile than the other portfolio.