What is the duration of a portfolio invested

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Reference no: EM132724800

Question 1. You are given the following spot rates on T0:

Maturity Rate
1y 2.5%
2y 3.2%
3y 3.8%

? Compute the forward rate between year 1 and year 2 (the 1y1y forward rate)
? Compute the forward rate between year 2 and year 3 (the 2y1y forward rate)
? Compute the forward rate between year 1 and year 3 (the 1y2y forward rate)

Question 2. Consider the following securities

Bond A has a duration of 7 and a price of $100
Bond B has a duration of 5 and a price of $110

? Approximate the percent change in the price of Bond A if rates increase by 50bps
? Approximate the dollar change in the value of Bond A if rates increase by 50bps
? Approximate the dollar change in the value of Bond B if rates increase by 50bps

Question 3. What is the duration of a portfolio invested 50% in 10-year zero coupon bonds and 50% 2-year zero coupon bonds?

Question 4. True or False? Explain your answers:
? The yield curve is usually upward sloping because bonds with longer maturities are riskier and investors expect higher returns
? A downward sloping yield curve indicates that investors do not expect interest rates to change in the future
? Bonds with higher coupons have lower interest rate risk
? The duration of a coupon bond with X maturity is always lower than a zero-coupon bond with the same maturity date

Reference no: EM132724800

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