Question

Setup B: George, a bond portfolio manager, owns the following four bonds with a combined market...

Setup B: George, a bond portfolio manager, owns the following four bonds with a combined market value of $20 million. The bond portfolio’s yield to maturity is 7.00 percent. When the government releases new economic numbers tomorrow, George believes yield to maturities will increase 100 basis points as there will be a parallel shift in yield curve.

Bond

Market Value

Duration (Years)

A

$2 million

2.0

B

$5 million

3.0

C

$6 million

4.0

D

$7 million

5.0

Total

$20 million

  1.       Assume George is correct and yield to maturities increase 100 basis points (there is a parallel shift in the yield curve). What will happen to the market value of the bond portfolio … bond portfolio’s market value is currently at $20 million so would it increase/decrease, by how much, and what would be the new market value for the bond portfolio?

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Answer #1

Bond duration approximates the percent change in the bond's price given 100 bp change in rates, with bond prices moving in opposite direction to the direction of movement in yield rates.

With this, we can calculate as shown in following screenshot:

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