(a) On the 1st May 2014, you bought the following portfolio of Commonwealth Gove
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Question
(a) On the 1st May 2014, you bought the following portfolio of Commonwealth Government bonds, how much did you pay for each bond per $100 face value and thus the total for the equally weighted portfolio: (b) Calculate the holding period yield for this portfolio of bonds if you sold them on the 30th April 2015. Assume the reinvestment rate is 2.00%pa. (c) Using a table format, manually calculate the duration and convexity for the 5.75% July 2022 Treasury bond on the 15th July 2014, if the yield was 3.270%. (d) Using a spreadsheet (Excel) and its duration formula, calculate the duration for all the bonds as at 30th April 2015. (e) Comparing the two sets of rates, what can you say about the term structure? Note: show all calculations for parts (a) to (e).Explanation / Answer
a. Title Treasury Bonds Treasury Bonds Treasury Bonds Treasury Bonds Treasury Bonds Description Treasury Bond 134 Treasury Bond 132 Treasury Bond 128 Treasury Bond 142 Treasury Bond 140 Face Value $100.00 $100.00 $100.00 $100.00 $100.00 Coupon Rate 4.75% 5.50% 5.75% 4.25% 4.50% PMT $4.75 $5.50 $5.75 $4.25 $4.50 Nper days 540 1360.75 3361 4371 6926 Nper Years = days/365 1.5 3.7 9.2 12.0 19.0 Yield to maturity (rate) on 1-may -2014 2.65% 3.10% 3.77% 4.10% 4.48% Price (using PV function in excel) $103.01 $108.35 $115.21 $101.44 $100.32 b. Title Treasury Bonds Treasury Bonds Treasury Bonds Treasury Bonds Treasury Bonds Description Treasury Bond 134 Treasury Bond 132 Treasury Bond 128 Treasury Bond 142 Treasury Bond 140 Face Value $100.00 $100.00 $100.00 $100.00 $100.00 Coupon Rate 4.75% 5.50% 5.75% 4.25% 4.50% PMT $4.75 $5.50 $5.75 $4.25 $4.50 Nper days 540 1360.75 3361 4371 6926 Nper Years = days/365 0.5 2.7 8.2 11.0 18.0 Reivestment Rate 2.00% 2.00% 2.00% 2.00% 2.00% Price (using PV function in excel) $101.30 $109.20 $128.13 $121.98 $137.44 Holding Period Return = Interest + Capital gain / Initial Investment 3.0% 5.9% 16.2% 24.4% 41.5% d. Title Treasury Bonds Treasury Bonds Treasury Bonds Treasury Bonds Treasury Bonds Description Treasury Bond 134 Treasury Bond 132 Treasury Bond 128 Treasury Bond 142 Treasury Bond 140 Settlement 30-Apr-15 30-Apr-15 30-Apr-15 30-Apr-15 30-Apr-15 Maturity 21-Oct-15 21-Jan-18 15-Jul-22 21-Apr-26 21-Apr-33 Yield 2.01% 1.93% 2.41% 2.70% 3.03% Coupon PMT $4.75 $5.50 $5.75 $4.25 $4.50 Duration 0.475 1.769 3.654 5.805 0.000
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