You own a bond portfolio worth $426,791. You estimate that your portfolio has an

Question

You own a bond portfolio worth $426,791. You estimate that your portfolio has an average yield-to-maturity of 5.8% and Macaulay Duration of 1 1.3 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) The new portfolio value would be (Round to a whole number)

Explanation / Answer

Solution: The new portfolio value would be $475,018 Working Notes: Change in bond Price % (dp/p) = -MD x dy MD = 11.3 years dy= change in YTM = -1% Change in bond Price % (dp/p) = -MD x dy = -11.3 x (-1%) = 11.3 % Change in portfolio value = Current portfolio value x (1+ %Change in bond price) = $426,791 x (1.113) =$475,018.383 =$475,018 Please feel free to ask if anything about above solution in comment section of the question.

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