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Portfolio A consists of $5,000 investment in a 1-year zero-coupon bond and $20,000 investment in...

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Accounting

  1. Portfolio A consists of $5,000 investment in a 1-year zero-coupon bond and $20,000 investment in a 20-year zero-coupon bond. Portfolio B consists of a 10-year zero-coupon bond with a face value of $17,000. The current yield on all bonds is 4% per annum (continuously compounded).
    1. Compute the actual percentage changes in the values of the two portfolios for a 20-basis point increase in yields.
    2. Compute the actual percentage changes in the values of the two portfolios for a 200-basis point increase in yields.
    3. Compute the duration for each portfolio. Use these durations to forecast the change in the value of each portfolio for a 20-basis point and a 200-basis point increase in yields.
    4. Compute the convexities for each portfolio. Use duration and convexity to forecast the change in the value of each portfolio for a 20-basis point and a 200-basis point increase in yields.
    5. Find the percentage forecast errors from c and d. Discuss your results.

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