22) Consider the following two-bond portfolio of option-free bonds; Bond A Bond B Years to maturity 5 years 10 years Coupon rate 5% 5% Par value 1000 1000 Yield to maturity 8% 6% Par amount owned R3,45 million R2 million Market value R30 367.59 (in 000's) R18 528 (in 000's) Required: a) Without doing any calculations, which bond would have a higher duration b) Assuming that Bond A is an option-free bond, calculate the bond's modified duration using Macauly's Duration. c) Assume that the duration of Bond A and B is 4.2 and 7.5 respectively; determine the duration of the portfolio.

22) Consider the following two-bond portfolio of option-free bonds; Bond A Bond B Years to maturity 5 years 10 years Coupon rate 5% 5% Par value 1000 1000 Yield to maturity 8% 6% Par amount owned R3,45 million R2 million Market value R30 367.59 (in 000's) R18 528 (in 000's) Required: a) Without doing any calculations, which bond would have a higher duration b) Assuming that Bond A is an option-free bond, calculate the bond's modified duration using Macauly's Duration. c) Assume that the duration of Bond A and B is 4.2 and 7.5 respectively; determine the duration of the portfolio.

Excel Applications for Accounting Principles

4th Edition

ISBN:9781111581565

Author:Gaylord N. Smith

Publisher:Gaylord N. Smith

Chapter11: Bond Pricing And Amortization (bonds)

Section: Chapter Questions

Problem 3R

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Question

100%

22) Consider the following two-bond portfolio of option-free bonds;
Bond A
Bond B
Years to maturity
5 years
10 years
Coupon rate
5%
5%
Par value
1000
1000
Yield to maturity
8%
6%
Par amount owned
R3,45 million
R2 million
Market value
R30 367.59 (in 000's)
R18 528 (in 000's)
Required:
a) Without doing any calculations, which bond would have a higher duration
b) Assuming that Bond A is an option-free bond, calculate the bond's modified
duration using Macauly's Duration.
c) Assume that the duration of Bond A and B is 4.2 and 7.5 respectively; determine
the duration of the portfolio.

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