Question 2
In your job as a 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. Your manager wants to understand how the value of the bond portfolio will change given the interest rate volatility.
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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.
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