Consider the following two-bond portfolio of option-free bonds; [9 Marks]

Bond A Bond B

Years to maturity 5 years 10 years

Coupon rate 5% 5%

Par value 1000 1000

Yield to maturity 8% 6%

Par amount owned R3,45 million R2 million

Market value R30 367.59 (in 000's) R18 528 (in 000's)

Required:

a) Without doing any calculations, which bond would have a higher duration

b) Assuming that Bond A is an option-free bond, calculate the bond's modified duration using Macauly's Duration.

c) Assume that the duration of Bond A and B is 4.2 and 7.5 respectively; determine the duration of the portfolio.