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Project III: Bond Portfolio Duration and Convexity A bond portfolio named VEX, comprises four bonds (face value=$1000): 1) 100 semi-annual bond, 5-year maturity, a coupon rate of 4% 2) 200 annual bonds, 30-year maturity, 8% coupon bond. 3) 300 zero coupon bonds, 10-year maturity. 4) 400 zero coupon bonds, 20-year maturity. 1. If required yield (discount rate) is 6% for all bonds per year, what is the market fair value of VEX? What is each bonds weight in the portfolio? (20% credit) 2. Given the 6% initial yield, what is the VEXs duration based on Macaulays method (detailed calculation of each coupon paying bonds duration must be presented)? (20% credit) 3. What is the time to maturity of VEX? Is VEXs duration shorter or longer than its time to maturity? What is the meaning of VEXs duration, how to interpret it? (10% credit) 4. According to the duration-price formula with Macaulays duration D, if the yield increases from 6% to 8%, the VEXs market value should fall by how much ($)?(10% credit) 5. Calculate each bonds convexity using Excel template. Then calculate VEXs portfolio convexity (detailed calculation of each bonds convexity must be presented). Bond 1 (semi-annual coupon bond): Bond 2 (annual coupon bond): Bond 3 (zero coupon bond): Bond 4 (zero coupon bond): Considering VEXs convexity, when the yield increases from 6% to 8%, the VEXs market value should fall by how much ($)?(10% credit) 6. What is the difference of price drop between a formula with and without convexity? (10% credit) 7. Repeat question 4, 5, and 6 if the yield decreases from 6% to 4%. (20% credit) Note: all detail calculations and Excel work must be presented.

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