Question

Problem 13-10 A university endowment fund has sought your advice on its fixed-income portfolio strategy. The characteristics of the portfolio's current holdings are listed below: Bond A Credit Rating U.S. Govt. Maturity (yrs.) 3 Coupon Modified Rate(%) Duration Convexity 2.724 9.8 6.004 56.2 3.504 18.6 Market Value of Position $34,000 34,000 34,000 34,000 34,000 $170,000 10.909 128.8 a. Calculate the modified duration for this portfolio (le, Mod Do). Do not round Intermediate calculations. Round your answer to three decimal places years 1. Suppose you learn that the implied sensitivity , modified duration of the endowment's abilities is about 6.30 years. Identify whether the bond portfolio is: (1) immunted against interest rate risk. (2) exposed to net price risk of (3) exposed to net reinvestment risk The portfolio's duration is the ability's duration, portfolio Set

Answer 1

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Answer:

a)

Bond Modified duration (yrs) Market value ($) Weight Weight Modified duration 10.5448 1.2008 A JB [2.724 16.004 3.504 14.868 34,000 34,000 34,000 34,000 34,000 10.2 0.2 10.2 10.2 0.2 0.7008 O 0.9736 2. 1818 O 10.909 Total 170000 5.6018

b)

b) The modified duration of the portfolio is less than the implied modified duration. Thus, the portfolio is not immunized against interest rate risk and exposed to price risk also. Due to the interest rate risk and price risk, the portfolio is also exposed to the reinvestment risk also. If in the future, there is parallel upward shift in the yield curve then due to the rise in interest rate the price of the bond will decrease. So, there may be capital loss to the fund if the duration of the portfolio is not matched.