1. You are managing a portfolio of $5 million. Your target duration is 10 years, and you can choose from two bonds: a zero-coupon bond with a maturity of 5 years, and perpetuity, each currently yielding 8.00%.
(Please show how to do it and excel if possible) thank you.
First of all we will calculate the duration of perpetual bond using the formulae 1+y / y
1.08 / 0.08 = 13.5
Duration of ZCB is its maturity ie 5 years
Calculation of weight
Let the weight of ZCB be X, then weight of perpetail bond is 1-X
(X * 5) + (1-X)*13.5 = 10
X = 41.17 (weight of ZCB)
(1-X) = 58.83 (weight of Perpetual Bond)
b) after 1 year duration of ZCB = 4, duration of perpetaul bond = 13.5
Calculation of wiight for target duration of 9
(X*4) + (1-X)*13.5 = 9
X = 47.36 weight of ZCB
52.63 = weight of perpetual bond
c) Calculation of duration of portfolio using orignal weights after 1 year
(0.4117 * 4) + (0.5883 * 13.5) = 9.58
Since target duration after 1 year is 9 difference in duration is 0.58
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