Suppose you are looking to put together a portfolio using 2 bonds A and B. Bond

Question

Suppose you are looking to put together a portfolio using 2 bonds A and B. Bond A has a duration of 7.80 and bond B has a duration of 14.08. What is the weight you should put on bond B, if the goal is to achieve a portfolio duration 10?

Round your answer to 3 decimal places. For example if your answer is 21.52%, then please write down 0.215.

Hint: The weights put on bond A and B have to add up to 1, and the weighted average duration of bond A and B has to be 10. That should give you a system of two equations with two unkowns. The question asks for one of the two unkowns.

Explanation / Answer

Duration of a portfolio is weighted average of the duration of two bonds in portfolio.

Assume weight of Bond A = w1, then weight of bond B is (1 - w1).

10 = w1 * 7.80 + (1 - w1) * 14.08

10 = (7.80 * w1) + 14.08 - (14.08 * w1)

-4.09 = -6.28 * w1

w1 = 64.97% ----> Weight of Bond A

Weight of Bond B = 1 - 64.97% = 35.03% --> Answer

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