Portfolio A consists entirely of $1,000 zero coupon bonds that mature in 8, 9, and 10 years.

Question:

Portfolio A consists entirely of $1,000 zero coupon bonds that mature in 8, 9, and 10 years. Portfolio B consists of $1,000, 8 percent coupons that mature in 10, 15, and 20 years.

a) Based on this information, which portfolio appears to be riskier? Why?

b) If the rate of interest on comparable bonds is 8 percent, what are the price and duration of each bond?

c) What is the average duration of each portfolio based on each bond’s duration?

Does this information change your answer to (a)?

d) What is the percentage loss for each portfolio if the comparable interest rate rises to 10 percent?

e) What does the previous answer imply about the importance of duration to the management of risk?

Coupon
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a... Portfolio
A portfolio is a grouping of financial assets such as stocks, bonds, commodities, currencies and cash equivalents, as well as their fund counterparts, including mutual, exchange-traded and closed funds. A portfolio can also consist of non-publicly...