Compute the duration of the portfolio

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A portfolio consists of a one-year zero-coupon bond with a face value of £2,000 and a 6- year zero-coupon bond with a face value of £4,950. The current yield on all bonds is 10% per annum (continuously compounded).

a) Compute the duration of the portfolio.

b) Compute the exact change in the value of the portfolio for a 0.1% per annum increase in yields. Compute the approximate change in value of the portfolio by using the duration you computed in a). Compute the error between the exact value and the duration approximation.

c) Compute the exact change in the values of the portfolio for a 5% per annum increase in yields. Compute the approximate change in value of the portfolio by using the duration you computed in a). Compute the error between the exact value and the duration approximation.

d) Compare the errors you computed in b) and c). Explain why they are so similar or so different?

Reference no: EM132622034

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