Consider the following portfolio of corporate bonds. All bonds pay interest semi-annually on a 30/360 days basis:
Question:
Consider the following portfolio of corporate bonds. All bonds pay interest semi-annually on a 30/360 days basis:
Required:
(a) Calculate the price for each bond and the market value of each bond.
(b) Calculate the aggregate market value of the portfolio.
(c) Calculate the modified duration for each bond.
(d) Calculate the modified duration for the portfolio.
(e) If interest rates increased by 50bp at all maturities, based on the modified duration calculated in (d), by what percentage would the market value of the portfolio change (show increases in price as a positive percentage; decreases as a negative percentage)?
(f) Will the amount calculated in (e) over-estimate or under-estimate the actual prices based on that interest rate change?
(g) If interest rates decreased by 50bp at all maturities, based on the modified duration calculated in (d), by what percentage would the market value of the portfolio change (show increases in price as a positive percentage; decreases as a negative percentage)?
(h) Will the amount calculated in (g) over-estimate or under-estimate the actual prices based on that interest rate change?
Expert Answer:
1 market price of a bond is determined using the current interest rate compared to the interest rate stated on the bond The market price of the bond comprises two parts The first part is the present v... View the full answer
