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butalik [34]
3 years ago
7

Your bond portfolio consists of $30 million worth of Treasury STRIPS with 7 years to maturity, and $10 million of Treasury notes

with a Macaulay duration of 3 years. The term structure is flat, and all spot rates are 3%.
What is the modified (not Macaulay) duration of your portfolio?

a) 3 years
b) 4 years
c) Slightly less than 4 years
d) Slightly greater than 4 years
e) None of these
Business
1 answer:
Verdich [7]3 years ago
5 0

Answer:

<em>d) Slightly greater than 4 years</em>

Explanation:

<em>The portfolio's Macaulay period (MaD) is the mean maturity of its retained earnings.</em>

Fifty per cent of cash flows (in terms of PV) come after three years and another fifty per cent arrive after five years, so the MaD is 0.53 + 0.55 = 4.

We must divide the MaD by (1+ytm/2) to get Modified Duration (MoD).

<em>Then portfolio MoD is </em><u><em>4/(1 + 0.02/2) = 3.96.</em></u>

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