Part 1

An investor is planning a $100M short-term investment and is going to choose among two different portfolios.

This investor is seriously worried about interest rate volatility in the market. Compute the duration of the portfolios.

Which one is more adequate for the investor's objective?

Assume today today is May 15, 2015 which means you may the use the following yield curve:

Maturity Yield

0.25 6.33%

0.50 6.49%

0.75 6.62%

1.00 6.71%

1.25 6.79%

1.50 6.84%

1.75 6.87%

2.00 6.88%

2.25 6.89%

2.50 6.88%

2.75 6.86%

3.00 6.83%

3.25 6.80%

3.50 6.76%

3.75 6.72%

4.00 6.67%

4.25 6.62%

4.50 6.57%

4.75 6.51%

5.00 6.45%

5.25 6.39%

5.50 6.31%

5.75 6.24%

6.00 6.15%

6.25 6.05%

6.50 5.94%

6.75 5.81%

7.00 5.67%

7.25 5.50%

7.50 5.31%

Portfolio A:

40% invested in 4.5 year bonds paying 5% semiannually

25% invested in 7-year bonds paying 2.5% semiannually

20% invested in 1.75 floating rate bonds with a 30 basis point spread, paying semiannually.

10% invested in 1-year zero coupon bonds

5% invested in 2-year bonds paying 3% quarterly

Portfolio B:

40% invested in 7-year bonds paying 10% semi-annually

25% invested in 4.25 bonds paying 3% quarterly

20% invested in 90-day zero coupon bonds

10% invested in 2-year floating rate bonds with zero spread, paying semi-annually

5% invested in 1.5 year bonds paying 6% semiannually.

Part 2

Compute the Macaulay and modified duration for the same securities as Part 1.

Part 3

Using the yield curve above, compute the dollar duration for the following securities:

a) Long a 5-year coupon bond paying 4% semiannually

b) Short a 7-year coupon bond

c) Long a 3.5 year coupon bond paying 7% quarterly

d) Long a 2-year zero spread floating rate bond paid semiannually

e) Short a 2.25 year zero spread floating rate bond paid semiannually