FIN205: In your job as financial analyst for an investment company, you are in charge of the company’s bond portfolio: Data Technologies For Financial Modelling Assignment, SUSS, Singapore

Question 2

In your job as financial analyst for an investment company, you are in charge of the company’s bond portfolio. Recently, there has been a rise in volatility in the interest rates. You manager wants to understand how the value of the bond portfolio will change given the interest rate volatility.

There are 2 bonds (1 Bond A and 1 Bond B) in your portfolio:

(a) Compute fair value of the bond portfolio.

(b) Calculate the modified duration and convexity for Bonds A and B.

(c) Assess the impact of interest rate volatility (-1% and +1% change in yields) on the value of the bond portfolio.

(d) Suggest to your manager how the company can reduce the volatility of the value of the bond portfolio.