Today is 15 September 2019. To construct a portfolio, Mike just purchased three different Treasury bonds, henceforth
Question:
Today is 15 September 2019. To construct a portfolio, Mike just purchased three different Treasury bonds, henceforth referred to as Bond A, Bond B and Bond C. Assume the yield rate for all these financial instruments is j2 = 3.2% p.a.
- Bond A has a coupon rate of j2 = 3.25% p.a. and a face value of $100. The maturity date of this bond is 15 March 2021.
- Bond B has a coupon rate of j2 = 3.15% p.a. and a face value of $100. The maturity date of this bond is 15 April 2022.
(a) Calculate the duration and modified duration of Treasury Bond A. Give your answer in terms of years (rounded to 3 dp)
(b) calculate the price Mike paid for Bond A (rounded to 3 dp)
(c) Calculate Mike's purchase price of Bond B by using the RBA method (rounded to 3dp)
(d) Mike purchased 100 units of Bond A and 205 units of Bond B to establish his portfolio. Based on your results from part (a), (b) and (c) above, calculate the duration of Mike's portfolio. Given that bond B has duration of 2.468 years. Give your answer in terms of years (rounded 2dp)
(e) Mike plans to use his portfolio to pay a future liability. Can he use the portfolio to immunise the interest rate risk of meeting this liability? Explain your answer
(f) Mike also wants to consider to purchase Bond C with the price being $99.782. Assume that bond C has a duration of 1.478 years and the yield rate for this bond is j2 = 3.2% p.a. Without actually calculating the new price for Bond C, use the price and duration value to estimate (use price sensitivity formula) the change in price of Bond C that would result from an increase in yield rate (j2) by 5 basis points. Round your answer to 2 dp.