Find the duration and the modified duration of each bond

Assignment Help Financial Management

Reference no: EM131620220

Elliot Karlin is a 35-year-old bank executive who has just inherited a large sum of money. Having spent several years in the bank's investments department, he's well aware of the concept of duration and decides to apply it to his bond portfolio. In particular, Elliot intends to use $1 million of his inheritance to purchase 4 U.S. Treasury bonds:

1. An 8.69%, 13-year bond that's priced at $1,100.37 to yield 7.47%.

2. A 7.763%, 15-year bond that's priced at $1020.73 to yield 7.53%.

3. A 20-year stripped Treasury (zero coupon) that's priced at $198.52 to yield 8.25%.

4. A 24-year, 7.48% bond that's priced at $956.15 to yield 7.89%.

Note that these bonds are semiannual compounding bonds.

a. Find the duration and the modified duration of each bond.

b. Find the duration of the whole bond portfolio if Elliot puts $250,000 into each of the 4 U.S. Treasury bonds.

c. Find the duration of the portfolio if Elliot puts $340,000 each into bonds 1 and 3 and $160,000 each into bonds 2 and 4.

d. Which portfolio—b or c—should Elliot select if he thinks rates are about to head up and he wants to avoid as much price volatility as possible? Explain. From which portfolio does he stand to make more in annual interest income? Which portfolio would you recommend, and why?

Reference no: EM131620220

Questions Cloud

Check your loan balance : This year (10 years after you first took out the loan), you check your loan balance. How much interest have you paid so far (over the last 10 years)?

What would be your bond equivalent yield : What would be your bond equivalent yield if you sold the bond for current market price of ?$1,042??

Ten years after you first took out the loan : This year (10 years after you first took out the loan), you check your loan balance. Only part of your payments have been going to pay down the loan.

Annual depreciation tax shield for a profitable firm : What is the annual depreciation tax shield for a profitable firm in the 30% marginal tax bracket with $100,000 of annual depreciation expense?

Find the duration and the modified duration of each bond : Find the duration and the modified duration of each bond. Find duration of whole bond portfolio if Elliot puts $250,000 into each of the 4 U.S. Treasury bonds.

Which yield would you use to value this bond : Now which yield is the highest? Which is the lowest? Which yield would you use to value this bond?

What is the optimal order amount according to the EOQ : AIA Inc. is looking to manage its cash position using the EOQ model. what is the optimal order amount according to the EOQ?

What is the conversion value of this issue : What is the bond's conversion price? What is the conversion value of this issue? What is its conversion parity?

Cash position using EOQ model : AIA Inc. is looking to manage its cash position using the EOQ model. What are the total costs (annual storage costs + annual order costs) associated with EOQ.

User Account

All Pages