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A portfolio of short-term bonds has expected cash flows of $350mln, $274mln, and $241mln at the...

A portfolio of short-term bonds has expected cash flows of $350mln, $274mln, and $241mln at the end of Years 1, 2, and 3, respectively. Currently, the appropriate one-, two-, and three-year yields are 2.31%, 3.47%, and 3.87%, respectively. What is the portfolio's two-year rate duration? Round to four decimals

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Answer #1

Duration of a bond is the sumproduct of the weighted cash flow, multiplied by its period and summed up.

Present Value is calculated by using Excel formula of PV: PV(rate,nper,pmt,FV)

Weighted Cash flow is calculated : Present value / sum of total present value

period (nper) cash flow(FV) rate present value(PV) weighted cash flow duration
1 350 2.31% 342.10 .5720 .5720
2 274 3.47% 255.93 .4280 .8559
Total 598.03 Total 1.4279

The portfolio's two-year rate duration is : 1.4279

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