Question

a. Take a bond portfolio whose modified duration is -7; the portfolio's value is $1,000,000. How much will the portfolio value change if the yield rises by 1 basis point (0.01% or 0.0001)?

b. If you want to hedge this portfolio against an increase in yield (decline in value) using a different bond whose modified duration is -10, will you buy or sell this hedge bond? and how much in value (i.e. not principal amount) will you buy or sell?

Answer #1

An investor holds a bond portfolio with principal value
$10,000,000 whose price and modified duration are respectively 112
and 9.21. He wishes to be hedged against a rise in interest rates
by selling futures contracts written on a bond. Suppose the price
of the cheapest-to-deliver issue is 105.2. The nominal amount of
the futures contract is $100,000. The conversion factor for the
cheapest-to-deliver is equal to 0.981. The cheapest-to-deliver has
a modified duration equal to 8. Additionally, assume that if...

A manager is holding a $3.8 million bond portfolio with a
modified duration of 7 years. She would like to hedge the risk of
the portfolio by short-selling Treasury bonds. The modified
duration of T-bonds is 10 years. How many dollars' worth of T-bonds
should she sell to minimize the risk of her position?
(Enter your answer in dollars not in
millions.)
Worth of T-bonds

A manager is holding a bond portfolio worth $19 million with a
modified duration of 6 years. She would like to hedge the risk of
the portfolio by short-selling Treasury bonds. The modified
duration of T-bonds is 8 years. How many dollars’ worth of T-bonds
should she sell to minimize the variance of her position?
(Enter your answer in dollars not millions rounded to the
nearest dollar value.)

A manager is holding a $4.0 million bond portfolio with a
modified duration of 8 years. She would like to hedge the risk of
the portfolio by short-selling Treasury bonds. The modified
duration of T-bonds is 10 years. How many dollars' worth of T-bonds
should she sell to minimize the risk of her position? (Enter your
answer in dollars not in millions.)
calculate the Worth of T-bonds $

Consider a $25 million bond portfolio having a modified duration
of 7.5. Its manager would like to immunize the portfolio against
interest rate risk using T-Bond futures. The futures contract price
is 110-10 and the cheapest to deliver bond has a modified duration
of 10. Determine the appropriate hedging transaction: (and why)
A. Buy 170 US T-Bond futures contracts
B. Sell 170 US T-Bond futures contracts
C. Buy 302 US T-Bond futures contracts
D. Sell 302 US T-Bond futures contracts...

The modified duration of your
client’s bond portfolio worth $1 million is 5 years. By
approximately how much does the value of the portfolio change if
all yields increase by 5 basis points? (Show Work).

1) A 7%, 33-year bond has a yield-to-maturity of 10% and a
modified duration of 8.32 years. If the market yield drops by 21
basis points, how much percentage change will there be in the
bond’s price?
2)You can analyze the determinants of firm value using
_____________________.
momentum analysis
technical analysis
fundamental analysis
none of the above

Suppose I have a $1 million worth of bond portfolio whose duration
is 20. If the interest goes up by 80 basis point, how much do I
make or lose with my portfolio?

If a bond portfolio has a market value of $35 million and a
Macaulay duration of 5.4 years, what is the expected change in
market value for a 1% decrease of interest rates using the modified
duration approximation? The portfolio has a yield-to-maturity of
7%.
a. -$1.89 million
b. -$1.77 million
c. +$1.77 million
d. +$1.89 million

Suppose you own following bond portfolio
Face Value
Bond Type
Maturity
yield to maturity
Portfolio I
$88 million
Zero Coupon
5 years
4%
You expect interest rate to rise in near future(hence decrease
the value of bond portfolio). You decided to sell some of 5-year
bond and use that proceed to buy 1.5-year zero coupon bonds with
yield to maturity 3%. If you want new duration of the portfolio to
be 3 years (that mean after selling 5-year bond and...

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