Consider the use of Bond A and Bond B to immunize a portfolio. Bond A is a
Question:
Consider the use of Bond A and Bond B to immunize a portfolio. Bond A is a pure discount five year bond yielding 10%. Bond B is a 2 year 12% coupon bond yielding 12% with duration of 1.89 years. You are managing a $1,000,000 portfolio which you would like to immunize for 3 years.
) Find the current price of Bond A
b) Find the current price of Bond B
c) Find the duration of Bond A
d) Find the percentages of your portfolio that you would invest in Band A and Bond B respectively
e) How many of each type of bond would be purchased?
f) Compute the expected yield from the portfolio computed in part d
g) EXTRA CREDIT: Compute the amount that the portfolio would grow into three years assuming interest rates remain constant
Fundamentals of Corporate Finance
ISBN: 978-1260153590
12th edition
Authors: Stephen M. Ross, Randolph W Westerfield, Robert R. Dockson, Bradford D Jordan