Task 1:

a. You own a two-bond portfolio. Each has a par value of $1,000. Bond A matures in five years, has a coupon rate of 8 percent, and has an annual yield to maturity of 9.20 percent. Bond B matures in fifteen years, has a coupon rate of 8 percent and has an annual yield to maturity of 9.20 percent. Both bonds pay interest semi-annually. What is the value of your portfolio? What happens to the value of your portfolio if each yield to maturity rises by one percentage point?

b. Rather than own a five-year bond and a fifteen-year bond, suppose you sell both of them and invest in two ten-year bonds. Each has a coupon rate of 8 percent (semi-annual coupons) and has a yield to maturity of 9.20 percent. What is the value of your portfolio? What happens to the value of your portfolio if the yield to maturity on the bonds rises by one percentage point?

c. Based upon your answers to (a) and (b), evaluate the price changes between the two portfolios. Were the price changes the same? Why or why not?

Task 2:

Construct a spreadsheet to replicate the analysis of the table.

That is, assume that $10,000 is invested in a single asset that returns 7 percent annually for twenty-five years and $2,000 is placed in five different investments, earning returns of 100 percent, 0 percent, 5 percent, 10 percent, and 12 percent, respectively, over the twenty-year time frame. For each of the questions below, begin with the original scenario presented in the table:

a. Experiment with the return on the fifth asset. How low can the return go and still have the diversified portfolio earn a higher return than the single-asset portfolio?

b. What happens to the value of the diversified portfolio if the first two investments are both a total loss?

c. Suppose the single-asset portfolio earns a return of 8 percent annually. How does the return of the single-asset portfolio

Spreadsheet:

			Diversification Illustration (Invest $10,000 over 25 Years)
	Investment Strategy 1: All funds in one asset				Investment Strategy 2: Invest Equally in five different assets
Number of Assets	1			Number of assets	5
Initial investment	$10,000			amount invested per asset	2,000
number of years	25			Number of years	25
annual asset return	7%			5 asset returns(annual)
Total accumulation at the end of the time frame: Total funds	$54,274.33				-100%
				Asset 1 return
				Asset 2 return	0%
				Asset 3 return	5%
				Asset 4 return	10%
				Asset 5 return	12%
				Total Accumulation at the end of the time frame:
				Asset 1	$0.00
				Asset 2	$2,000.00
				Asset 3	$6,772.71
				Asset 4	$21,669.41
				Asset 5	$34,000.13
				Total Funds	$64,442.25