Question
Now consider ALM using duration and convexity matching of assets and liability. The three-bond portfolio of assets that you are going to employ are: Bond
Now consider ALM using duration and convexity matching of assets and liability. The three-bond portfolio of assets that you are going to employ are:
Bond paying 10% coupons for 5 years
Bond paying 10% coupons for 10 years
Bond paying 10% coupons for 15 years
Assume a flat term structure of 10% (YTM). That means all bonds are trading at par.
What is quantity of each bond you shall have in your portfolio to match the duration and convexity of the asset portfolio with that of the liability? Assume fractionalization of bonds is possible (Hint: Watch the last six minutes of the EXCEL lecture for this week)
Quantities of Each Bond in Portfolio:
| Quantities of Each Bond in Portfolio: | |
| Bond 1 (q1) (10% coupons for 5 years): | 52.77% (0.527704114450125) |
| Bond 2 (q2) (10% coupons for 15 years): | 47.96% (0.479552440044149) |
| Bond 3 (q3) (10% coupons for 10 years): | 23.25% (0.232534404867008) |
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