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Perpetual and zero bonds

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Reference no: EM131012610

You are managing a portfolio of $1,000,000. Your target duration is 10 years and you can choose from two bonds: a zero coupon bond with maturity of 5 years, and a perpetuity, each currently yielding 5%.

  • How much of each bond will you hold in your portfolio?
  • How will these fractions change next year if target duration is now 9 years?
  • What is the value of perpetuity bond today, assuming it pays $1000 per year?
  • What is the value of the zero coupon bond today?
  • How many of the perpetual and zero bonds would you be purchasing today?

Reference no: EM131012610

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