# Question

a. You own a two-bond portfolio. Each has a par value of $1000. Bond A matures in 5 years, has a coupon rate of 8 percent, and has a annual yield to maturity of 9.20 percent. Bond B matures in 15 years, has a coupon rate of 8 percent and has an annual yield to maturity of 9.20 percent. Both bonds pay interest semiannually. What is the value of your portfolio? What happens to the value of your portfolio if each yield to maturity rises by one percentage point?

b. Rather than own a 5-year bond and a 15-year bond, suppose you sell both of them and invest in two 10-year bonds. Each has a coupon rate of 8 percent paid semiannually and has a yield to maturity of 9.20 percent. What is the value of your portfolio? What happens to the value of your portfolio if the yield to maturity on the bonds rises by one percentage point?

c. Based upon your answers to parts a) and b), evaluate the price changes between the two portfolios. Were the price changes the same? Why or why not?

b. Rather than own a 5-year bond and a 15-year bond, suppose you sell both of them and invest in two 10-year bonds. Each has a coupon rate of 8 percent paid semiannually and has a yield to maturity of 9.20 percent. What is the value of your portfolio? What happens to the value of your portfolio if the yield to maturity on the bonds rises by one percentage point?

c. Based upon your answers to parts a) and b), evaluate the price changes between the two portfolios. Were the price changes the same? Why or why not?

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