1. Calculate the modified duration of the following three bonds. Assume a settle

Question

1. Calculate the modified duration of the following three bonds. Assume a settlement date of 6/30/2018 (DONE)

2. Calculate the modified duration of a portfolio composed of the three bonds, if you invest 30% in bond A, 35% in bond B and 35% in bond C. (15 points)

3. Recently, the Federal Reserve System has announced that it will buy back Treasury bonds and notes and, in exchange, inject more cash into the economy. As a result, you expect that such action will lead to a decrease in the yield of each note and bond by 0.5%. Devise a numeric example that would help the manager of an actively managed portfolio of bonds to further enhance the gain in his portfolio that would result from falling Treasury bond and note yields (15 points)

****I already calculated the modified duration, as shown in the chart. I need #2 & #3. Please show work!!!

BONDA 1.5% 1.6% 11/15/2018 8/15/2022 2/15/2025 BOND BBONDC 1.75% 1% 2.1% COUPON RATE YTM MATURITY COUPON FREQUENCY Modified Duration 1.6% 0.37 3.91 6.06

Explanation / Answer

2- Modified Duration of the Portfoilio will be weighted Average Modified Duration fo the bonds

= 0.30*0.37+0.35*3.91+0.35*6.06

=3.60

3- When Yiledis expected to decreas by 0.5%, then appreciation in the portfolio expectedto be =3.60*0.5%

=1.8%

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