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Calculate the duration of the groups of securities

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Reference no: EM133035756

1. A major bank is to sell securities from an existing security portfolio to ensure it has sufficient liquid funds available over the next one-month planning period. The bank wishes to sell a group of securities with the higher interest rate risk. Using the data below:

-Eurobonds, face value $30 million, four years to maturity, fixed annual coupon of 9.25 per cent per annum.

-Corporate bonds, face value $30 million, three years to maturity, fixed annual coupon of 10.40 per cent per annum.

-Current yields on these securities are 9.60 per cent per annum and 10.85 per cent per annum respectively.

a. Calculate the duration of each of the groups of securities. Show all calculations.

b. Which securities will the investor sell?

2. A funds manager is holding fixed-interest bonds with a face value of  $4 750 000. The bonds pay an annual coupon of 6.00 per cent per annum and will mature in exactly three years. The funds manager has forecast that interest rates will rise by 50 basis points. Based on the forecast change in interest rates:

a. Calculate the price of the bond using duration. Note current rate is 6.00 per cent.

b. Calculate the price of the bond using the bond pricing formula.

c. Draw and fully label a diagram to explain the relationship between duration and convexity using the data from (a) and (b).

Reference no: EM133035756

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