Part A : Please solve using Excel. It is May 15, 2000 and an investor is planning to invest $100 million in one of the two portfolios below. The investors main concern is the change in interest rates that might affect the short term value of the portfolio. Compute the change in price of the security stemming from duration and convexity. Which portfolio is less sensitive to changes in interest rates? The portfolios are the following:

Portfolio A

- 30% invested in 5-year coupon bonds paying 4% quarterly

- 25% invested in 4 1/4-year coupon bonds paying 6% semiannually

- 20% invested in 90-day zero coupon bonds

- 15% invested in 2 1/2-year floating rate bonds with zero spread paid quarterly

- 10% invested in 6-year zero coupon bonds

Portfolio B

- 40% invested in 7-year coupon bonds paying 2% semiannually

- 30% invested in 3 1/4-year floating rate bonds with 50 basis point spread paid semiannually

- 20% invested in 4-year coupon bonds paying 3.5% semiannually

- 10% invested in 90-day zero coupon bonds

Part B : Please solve using Excel. Consider the exercise above. You are told that the mean of daily change in interest rates is zero and that the variance of the daily change of interest rates is 3.451 x 10 - 7. What is the annualized expected return taking into account convexity?

Thank you for your help!