Consider a bond portfolio, which consists of 1,000 units each of three bonds: Bond A with annual...

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Finance

Consider a bond portfolio, which consists of 1,000 units each ofthree bonds:
Bond A with annual coupons, a coupon rate of 7%, maturity of 6years, and YTM of 6.5%.
Bond B, a perpetuity with coupon rate of 7.5%, and YTM of6.0%.
Bond C, a zero-coupon bond with YTM of 6.9% and maturity of 5year.
Calculate the total current market value of the portfolio.
Calculate the modified duration of the portfolio
What would be the new market value of the portfolio if interestrates were to increase by 60 basis points across board? (usemodified duration approach)
Suggest a portfolio adjustment the manager can use to mitigatethe portfolio’s exposure to the yield increase.

Answer & Explanation Solved by verified expert

3.6 Ratings (265 Votes)

Assume face value of each bond to be 1000 Market value of bond A PV Rate period PMT FV PV 65 6 7 x 1000 1000 10242051 Market value of bond B Coupon yield 75 x 1000 6 12500000 Market value of Bond C Face value 1 yieldn 1000 1 695 7163272523 Part a Portfolio comprises of 1000 units of each of the three bonds hence market value of the portfolio 1000 See Answer

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