ASSIG Insert Draw Design Layout References Mailings Review View Tell me what you

Question

ASSIG Insert Draw Design Layout References Mailings Review View Tell me what youw Calibri (Body-112 . A, A' Aa- .ta-B- 11 Emphasis Blu-abc x, x, A.y.a- Headin Font Paragraph Due December 7th, by class time You currently manage a $100 million Treasury note portfolio composed of three notes with the following characteristics: 1) COUPON RATE YTM MATURITY COUPON FREQUENCY BOND A 1.5% 1.6% BOND B 1.75% 1.6% BOND C 2% 2.1% 2/15/2025 11/15/20188/15/2022 Calculate the modified duration of the following three bonds. Assume a settlement date of 12/1/17 Bond A: 0.9443 years Bond B: 4.4798 years Bond C: 6.6356 years . Calculate the modified duration of a portfolio composed of the three bonds, assuming·that you invest 30% in bond A, 35% in bond B and 35% in bond C. Portfolio's Modified Duration= 4.1737 2) The economic outlook has been more favorable lately, and the Federal Reserve System is considering an end to "easy money", i.e. an end to its policy of injecting money in the economy (by buying back Treasuries). As a result, you expect interest rates to increase in the near future I Devise a numeric example that shows how, by changing the percent of money allocated to each of the three notes, you could lower the duration of your portfolio even further and partly mitigate losses in your portfolio that would result from increased yields.

Explanation / Answer

Part - A

Calculation of Modified Duration

Modified Duration = Duration /(1+YTM)

Bond A =0.9443/1.016

=0.9294%

Bond B =4.4798/1.016

=4.41%

Bond C =6.6356/1.021

=6.50%

Part - 2

Comprised Modified Duration

Modified Duration = (0.9294*30)+(4.41*0.35)+(6.50*0.35)

=4.09732%

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