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An Assignment On "Duration Calculation"

The document discusses calculating the duration of three bonds - Bond A, Bond B, and Bond C. It provides the details of each bond including coupon rate, years to maturity, yield to maturity, and face value. It then calculates the price and duration of each bond. Using the durations, it creates a portfolio with Bond A and Bond B and calculates the weighted duration. It determines the portfolio should invest 36.21% in Bond C and the remaining 63.79% between Bond A and Bond B based on their individual durations. Finally, it calculates how much of a $200,000 capital fund should be invested in each bond based on these weights.

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S.M. Aminul Haque
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86 views4 pages

An Assignment On "Duration Calculation"

The document discusses calculating the duration of three bonds - Bond A, Bond B, and Bond C. It provides the details of each bond including coupon rate, years to maturity, yield to maturity, and face value. It then calculates the price and duration of each bond. Using the durations, it creates a portfolio with Bond A and Bond B and calculates the weighted duration. It determines the portfolio should invest 36.21% in Bond C and the remaining 63.79% between Bond A and Bond B based on their individual durations. Finally, it calculates how much of a $200,000 capital fund should be invested in each bond based on these weights.

Uploaded by

S.M. Aminul Haque
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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An Assignment On

“Duration Calculation”

Course Title: Intermediate Finance

Prepared for,
Professor Dr. S. M. Ikhtiar Alam
Course instructor
FIN 512: Intermediate Finance
IBA-JU

Prepared by,
G.M. Sharmin Laila
ID-1888
MBA 25th Batch
Date of submission: 18th November, 2020

Institute of Business Administration


Jahangirnagar University
Question: Make a portfolio with 3 bonds, calculate the duration of
those bonds and then measure the amount of money how much should
invest on each bond.
Answer:
Let us take 03 bonds, Bond A, Bond B and Bond C. The features of these bonds are given below:

Bond Coupon Frequency Years to YTM (%) FV ($)


rate (%) maturity
A 8 Annually 4 5 1200
B 9 Annually 3 6 1000
C 10 Quarterly 2 7 1500

First, let us calculate the price and the duration of Bond A, Bond B and Bond C.

Bond A
t Cash flow, Ct PV of Ct at 5 % (3)/ Po [(3)/ Po] * t
(1) (2) (3) (4)
1 80 76.19048 0.059949 0.059949
2 80 72.56236 0.057094 0.114189
3 80 69.10701 0.054376 0.163127
4 1280 1053.059 0.828581 3.314323
PA=$1270.919 DA=3.6516
So, Price & Duration of Bond A are $1270.919 and 3.6516 years respectively.

Bond B
t Cash flow, Ct PV of Ct at 6 % (3)/ Po [(3)/ Po] * t
(1) (2) (3) (4)
1 90 84.90566 0.078602 0.078602
2 90 80.09968 0.074153 0.148307
3 1090 915.185 0.847244 2.541733
PB=$1080.19 DB=2.7686
So, Price & Duration of Bond B are $1080.19 and 2.7686 years respectively.
Bond C
In Bond C, frequency is given as quarterly. So, Coupon rate is (10÷2) =2.5%, YTM is (7÷4)
=1.75% and t=2×4=8.

t Cash flow, Ct PV of Ct at 7 % (3)/ Po [(3)/ Po] * t


(1) (2) (3) (4)
1 37.5 36.85504 0.023277 0.023277
2 37.5 36.22117 0.022877 0.045754
3 37.5 35.5982 0.022483 0.06745
4 37.5 34.98594 0.022097 0.088387
5 37.5 34.38422 0.021717 0.108584
6 37.5 33.79285 0.021343 0.128059
7 37.5 33.21164 0.020976 0.146833
8 1537.5 1338.258 0.84523 6.761837
Pc=$1583.307 DC=7.370181÷4
=1.8425
So, Price & Duration of Bond C are $1583.307 and 1.8425 years respectively.

Now, let’s make a portfolio with Bond A and Bond B.


Price of these bonds=$1270.919+$1080.19=$2351.11

Weighted duration of the Bonds: [(P0/Price of portfolio) *D]


Bond Calculation Weighted Duration
A ($1270.919/$2351.11)*3.651 1.973914
6
B ($1080.19/$2351.11)*2.7686 1.272001

Total duration of portfolio; Dp =1.973914+1.272001=3.2459

So, Wc=Dc /(Dp+ Dc) =1.8425/(3.2459+1.8425)=0.3621


And Wp= Dp /(Dp+ Dc) = 3.2459/(3.2459+1.8425)=0.6379
Wa = Da/ (Da +Db)* Wp =3.6516/(3.6516+2.7686)*0.6379=0.3628
Wb = Db/ (Da +Db)* Wp=2.7686/(3.6516+2.7686)*0.6379=0.2751

Here, Wa+Wb+Wc =0.3621+0.3628+0.2751=1 (Mathematical Logic Proved)


Now, let’s assume we need to invest a Capital Fund of $200,000 and we will invest in
bonds A, B, C according to their weight in the portfolio.
Bonds Weight of (1) * Capital Price of Number of Rounding off of Amount to
bonds Fund bonds, Po bonds to be the number of be invested
purchased = bonds to be = (5)*(3)
(2)/ (3) bought
(3) (6)
(1) (2)
(4) (5)

A 0.36 $72,000 $1270.919 56.65192 57 $72442.38

B 0.36 $72,000 $1080.19 66.65494 67 $72372.73

C 0.28 $56,000 $1583.307 35.36901 34 $53832.44

=$200,000 =$198647.6

Using our formula, we will invest $198647.6 or approximately $198648 in Bonds A, B


and C according to their weight.

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