Question

You are limited to investing in only two different bond issues. Bad Wolf Industries has a...

You are limited to investing in only two different bond issues. Bad Wolf Industries has a duration of 3.53 years and is quoted at 101.710 and Hypothetical Resources has a duration of 8.44 years and is quoted at 106.163. Both bonds are priced to yield 7.213% to maturity and the duration of the liability is 6.17 years. To immunize the portfolio you need to invest

________ % in Bad Wolf

and ________ % in Hypothetical Resources

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Homework Answers

Answer #1
Particulars Weight Duration Weighted Duration
Bad Wolf Industries X 3.53 3.53 X
Hypothetical resources ( 1 - X) 8.44 8.44 ( 1 - X)
Weighted Duration -4.91 X + 8.44

Let X be the weight in Bad Wolf Industries & ( 1 - X) in Hypothetical resources
Weighted Avg Duration ( Required Duration ) = 6.17
Thus -4.91 X + 8.44 = 6.17
-4.91 X + 8.44 = 6.17
-4.91 X = 6.17 - 8.44
-4.91 X = -2.27
X = 0.4623
1 - X = 1 - 0.4623
= 0.5377

Thus weight in Bad Wolf Industries is 46.23 %
Thus weight in Hypothetical resources is 53.77 %

Pls comment, if any further assistance is required.

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