The Charger Bond Fund (CBF) is considering two bonds as follows:

	Bond A	Bond B
Par	$100	$100
Maturity, years	2	5
Coupon rate	4%	6%
Yield to Maturity	3%	7%
Periodicity	Semiannual	Semiannual

The Charger Bond Fund has a two-year investment horizon.

1. What realized rate of return will CBF achieve from each bond if interest rates dont change?
2. What realized rate of return will CBF achieve if the yield curve shifts up by 100 bps on all securities, immediately after issue?
3. What realized rate of return will CBF achieve if the yield curve shifts down by 100 bps on all securities, immediately after issue?
4. Calculate the MacAulay and Modified durations of each bond.
5. Assume CBF invests in both bonds with 50:50 weights. What realized rate of return will it achieve over its holding period of two years? Assume no change in interest rates.
6. Calculate the durations of the portfolio with 50:50 weight.
7. Use the duration formula to calculate the change in portfolio value in response to 100 bps increase/decrease in interest rate.
8. If CBF wants to reduce its portfolios interest rate sensitivity, which of the two bonds should it weigh more/less?