Today is 1 July, 2019. Tony has a portfolio which consists of two different types of financial instruments (henceforth referred to as instrument A and instrument B). Tony purchased all instruments on 1 July 2014 to create this portfolio, which is composed of 27 units of instrument A and 48 units of instrument B.

• Instrument A is a zero-coupon bond with a face value of $100. This bond matures at par. Its maturity date is 1 January 2029.
• Instrument B is a Treasury bond with a coupon rate of j₂=4.71% p.a. and a face value of $100. This bond matures at par. Its maturity date is 1 January 2022.

What is the duration of instrument B?

Express your answer in terms of years.

Assume a yield rate of j₂=2.14% p.a.

Question 11Answer

a. 5.679 years

b. 2.391 years

c. 4.783 years

d. 2.840 years