Question

There are 2 bonds in the portfolio. Their current prices, interest rates, and durations are listed below. What is the change in the portfolio value due to a 1% drop in the interest rate?

Bond

A

B

Market price

800

1,200

Interest rate

7%

5%

Duration (year)

6

4

Select one:
a. An increase of $90.74
b. An increase of $93.77
c. A decrease of $89.54
d. A decrease of $86.01
e. An increase of $83.21

Answer 1

Current Value of Portfolio = $800 + $1,200

= $2,000.

Current Value of Portfolio is $2,000.

Percentage change in Bond A price = - Duration × Change in yield × 100

     = - 6 × (-1.00%) × 100

       = 6%

Percentage change in Bond A price is 6%.

New price of Bond A = $800 × (1 + 6%)

= $848.

New Price of Bond A is $848.

Percentage change in Bond B price = - Duration × Change in yield × 100

     = - 4 × (-1.00%) × 100

       = 4%

Percentage change in Bond B price is 4%.

New price of Bond B = $1,200 × (1 + 4%)

= $1,248.

New Price of Bond B is $1,248.

New value of portfolio = $848 + $1,248

= $2,096

New Value of Portfolio is $2,096.

Change in value of portfolio = $2,096 - $2,000

= $96.

Value of portfolio increase by $96.