Grace S. is extremely successful in managing her own investment portfolios. Grace has been playing with the idea of immunizing her bond portfolio. She will like to cash out her bond portfolio in 7 years and use the proceeds to buy a vacation home in Nova Scotia. To do this she intends to use $200,000 she now has invested in the flowing corporate bonds (she currently has $50,000 invested in each one):

1. A 12-year, 7.5% coupon bond currently priced at $895.00.
2. A 10-year, zero-coupon bond priced at $495.00.
3. A 10-year, 10% coupon bond priced at $1808.00
4. A 15-year, 9.25% coupon bond, priced at $980.00.

(Note: all the above bonds are non-callable, investment-grade, nonconvertible, annual coupon bonds).

Questions:

a). Given the information provided, find the current yield and the promised yield-to-maturity for each bond in her portfolio.

b). Given the following Macaulay durations:

Bond 1: 8.07 years

Bond 3: 6.89 years

Bond 4: 8.41 years

and your own calculation for the Macaulay duration for Bond 2, calculate the modified durations of each bond in the portfolio.

c). Indicate how each bond will change if rates were to rise by 75 basis-points. How each bond will change if rates were to fall by 75 basis-points?

d). Find the duration of her entire bond portfolio. Given the 7-year target that she has set, would you consider this an immunized portfolio? Explain.

e). Using 1 or more of the 4 bonds, put together an $200,000 immunized portfolio for Grace.