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a. You own a two-bond portfolio. Each has a par value of $1,000. Bond A matures in five years, has a coupon rate of 8 percent, and has an annual yield to maturity of 9.20 percent. Bond B matures in fifteen years, has a coupon rate of 8 percent and has an annual yield to maturity of 9.20 percent. Both bonds pay interest semi-annually. What is the value of your portfolio? What happens to the value of your portfolio if each yield to maturity rises by one percentage point?
b. Rather than own a five-year bond and a fifteen-year bond, suppose you sell both of them and invest in two ten-year bonds. Each has a coupon rate of 8 percent (semi-annual coupons) and has a yield to maturity of 9.20 percent. What is the value of your portfolio? What happens to the value of your portfolio if the yield to maturity on the bonds rises by one percentage point?
c. Based upon your answers to (a) and (b), evaluate the price changes between the two portfolios. Were the price changes the same? Why or why not?
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