Question
* Portfolio A consists of $5,000 investment in a 1-year zero-coupon bond and $20,000 investment in a 20-year zero-coupon bond. Portfolio B consists of a
* Portfolio A consists of $5,000 investment in a 1-year zero-coupon bond and $20,000 investment in a 20-year zero-coupon bond. Portfolio B consists of a 10-year zero-coupon bond with a face value of $17,000. The current yield on all bonds is 4% per annum (continuously compounded).
- Compute the actual percentage changes in the values of the two portfolios for a 20-basis point increase in yields.
- Compute the actual percentage changes in the values of the two portfolios for a 200-basis point increase in yields.
- Compute the duration for each portfolio. Use these durations to forecast the change in the value of each portfolio for a 20-basis point and a 200-basis point increase in yields.
- Compute the convexities for each portfolio. Use duration and convexity to forecast the change in the value of each portfolio for a 20-basis point and a 200-basis point increase in yields.
- Find the percentage forecast errors from c and d. Discuss your results.
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Financial and managerial accounting
Authors: Jerry J. Weygandt, Paul D. Kimmel, Donald E. Kieso
1st edition
978-1118016114
