Question 4 You’ve created a small bond portfolio by investing excess corporate c

Question

Question 4

You’ve created a small bond portfolio by investing excess corporate cash in two annual-coupon bonds. Bond J is a 5-year, 5% coupon with a $1,000 face value; and Bond K is a 4-year, 10% coupon with a $1,000 face value. The YTM for both bonds is 7%.

A. Calculate the price for Bond J.

B. Calculate the price for Bond K.

C. Calculate the portfolio duration, that is, the duration of both instruments considered together, using the prices you calculated for the bonds. (Hint: This is not just the arithmetic average of the two individual bond durations.)

Explanation / Answer

All Amounts in $ Based on the information given, A. The Price for Bond J works out to $ 917.996 or $ 918. B. The Price for Bond K works out to $ 1,101.616 or $ 1,101.62. C. The portfolio duration will be 5 years X 918 / 1000 + 4 years X 1101.62 / 1000 = 5 X 0.918 + 4 X 1.01162 = 8.636 years

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