3. Suppose you are a fixed-income analyst at a brokerage firm and you have been asked...
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3. Suppose you are a fixed-income analyst at a brokerage firm and you have been asked to evaluate the interest rate risk of a bond portfolio. The portfolio consists of three bonds with the following characteristics: Pav Value(Maluti) Coupon Rate (%) Maturity in years Market YTM(%) Price(Maluti) Bond A 1000 15 10 1100 4 Bond B 500 4 5 525 3 Bond C 2000 3 20 1850 2.5 a) Calculate the Macaulay duration and Modified duration of each bond. [16 Marks] b) Discuss which bond is the most sensitive to changes in interest rates and explain why. [4 Marks] c) Suppose the yield to maturity on each bond increases by 25 basis points (0.25%). Estimate the percentage change in the price of the bond portfolio based on both the Macaulay duration and Modified duration for each bond. [5Marks] 3. Suppose you are a fixed-income analyst at a brokerage firm and you have been asked to evaluate the interest rate risk of a bond portfolio. The portfolio consists of three bonds with the following characteristics: Pav Value(Maluti) Coupon Rate (%) Maturity in years Market YTM(%) Price(Maluti) Bond A 1000 15 10 1100 4 Bond B 500 4 5 525 3 Bond C 2000 3 20 1850 2.5 a) Calculate the Macaulay duration and Modified duration of each bond. [16 Marks] b) Discuss which bond is the most sensitive to changes in interest rates and explain why. [4 Marks] c) Suppose the yield to maturity on each bond increases by 25 basis points (0.25%). Estimate the percentage change in the price of the bond portfolio based on both the Macaulay duration and Modified duration for each bond. [5Marks]
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