Question 5 (15 marks)

We consider a portfolio composed of 100% (i.e., one unit) of bond A and 100% (i.e., one unit) of bond B, whose features are given below. Coupons are paid quarterly and compounding is quarterly.

Maturity Coupon YTM

Bond A 2 years 4% 5%

Bond B 5 years 5% 6%

a) Compute the yield-to-maturity of the portfolio

b) Estimate the $duration and modified duration of the portfolio

c) Estimate the $Convexity of the portfolio