It is May 15, 2000 and an investor is planning to invest $100 million in one of the two portfolios below. The investors main concern in the change in interest rates that might affect the short-term value of the portfolio. Compute the change in price of the security stemming from duration and convexity. Which portfolio is less sensitive to changes in interest rates? The portfolios are following:

Portfolio A

• 30% invested in 5-year coupon bonds paying 4% quarterly
• 25% invested in 4 -year coupon bonds paying 6% semiannually
• 20% invested in 90-day zero coupon bonds
• 15% invested in 2 -year floating rate bonds with zero spread paid quarterly
• 10% invested in 6-year zero coupon bonds

Portfolio B

• 40% invested in 7-year coupon bonds paying 2% semiannually
• 30% invested in 3 -year floating rate bonds with 50 basis point spread paid semiannually
• 20% invested in 4-year coupon bonds paying 3.5% semiannually
• 10% invested in 90-day zero coupon bonds

  maturity	yield	maturity	yield	maturity	yield
  0.25	3.33%	2.75	3.86%	5.25	3.39%
  0.5	3.49%	3	3.83%	5.5	3.31%
  0.75	3.62%	3.25	3.80%	5.75	3.24%
  1	3.71%	3.5	3.76%	6	3.15%
  1.25	3.79%	3.75	3.72%	6.25	3.05%
  1.5	3.84%	4	3.67%	6.5	2.94%
  1.75	3.87%	4.25	3.62%	6.75	2.81%
  2	3.88%	4.5	3.57%	7	2.67%
  2.25	3.89%	4.75	3.51%	7.25	2.50%
  2.5	3.88%	5	3.45%	7.5	2.31%