Calculate in Excel:

You are responsible for a portfolio of just two bonds:

Bond A is an asset with a face value of $40 million, a price of 102.4, a coupon rate of 4.25%, and exactly 5 years until maturity.

Bond B is a liability with face value of $60 million, a price of 98.6, a coupon rate of 3.75%, and exactly 10 years until maturity.

A. What is the duration of Bond A (carry out to four decimal places)?

B. What is the YTM of Bond B (carry out to nearest basis point)?

C. What is your duration gap if these are the only two bonds you are concerned with (carry out to four decimal places)?

D. If interest rates go up by 30 Basis Points, what do you expect the new price of Bond A to be, based on its modified duration (answer in dollars and cents, NOT percentage of face value)?

E. If you want to hedge the risk in this portfolio with an interest-rate swap, will you want to be the fixed-rate payer or the fixed-rate receiver (simply answer, "fixed-rate payer" or "fixed-rate receiver"?

Answer rating: 100% (QA)

A To calculate the duration of Bond A we can use the formula Duration Coupon Yield x Face Value 1 Yield x Face Value x 1 Yield x 1 1 Yieldn where Yiel... View the full answer