You own a bond portfolio worth $206,195. You estimate that your portfolio has an

Question

You own a bond portfolio worth $206,195. You estimate that your portfolio has an average yield-to-maturity of 5.35.3% and Macaulay Duration of 5.35.3 years. If interest rates went down one percentage point and your portfolio's yield-to-maturity changed by the same amount, what would be the new value of your bond portfolio?

(Hint: Not covered in the eText. Check your class notes and the TopHat note titled "Bond risk and duration".

Step 1: Compute DV01 as the portfolio's MacD divided by 1 plus the portfolio's YTM, multiplied by the value of the portfolio and divided by 100.

Step 2: Compute the change in the portfolio's value based on its starting value given in the question and the estimated change in value from Step 1).

Explanation / Answer

DV01 = 5.3/(1+5.3%) * 206,195/100 = 10,378.2858

so since the interest rates dropped the value of the portfolio will increase by that much

new value of the bond v=portfolio = 10,738.2858 + 206,195 = 216,573.29

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.