QUESTION 1 a) A financial consulting client requires you to evaluate his current portfolio.

When these positions were first set up in the portfolio, the total purchase price of the assets was exactly equal to the funding generated by the issuance of the liabilities.

The current details for the portfolio are as follow:

Asset: $10 million face value, 6-year coupon bond. 5% annual coupon payment, 3% yield to maturity.

Asset: $5 million face value, 3-year zero coupon bond. 3.5% yield to maturity.

Liability: $14 million face value, 6-year zero coupon bond. 4.2% yield to maturity.

i) You are requested to determine the current amount of profits for this portfolio. (Note that this is its net worth.) (20 marks)

ii) Determine the total Macaulay durations for your assets and your liabilities. (16 marks)

iii) Discuss what the likely impact on the portfolio will be, if interest rates are raised? (4 marks)

b) In your own words, explain what an interest rate floor and cap are. Discuss why an investor may benefit from an interest rate floor during the COVID-19 pandemic that occurred during the years 2020 and 2021.

(10 marks)