Answer:
One would have to invest 55%
Duration of 3-year bond is 2.78
Then 5wZ + 2.78(1 - wZ) = 4
2.22wZ = 1.22
wZ = .5495
Explanation:
To properly understand the concept behind the above calculation, let us define some basic concept:
Portfolio: This can be refereed to as a phrase in finance. It refers to the collection on investment that is being held by an investment company, a financial institution such as a bank ,persons or an individual.
Zero coupon bond: A zero-coupon bond is a bond where the nominal or return on investment (ROI) value is repaid at the time of maturity. This definition usually reflects a positive time value of money.
We should also recall that the formula for zero coupon bond as:
price = M / (1 + i)^n
where: M = maturity value
i = required interest yield divided by 2
Applying this formula, we were able to arrive at the investment percentage.
