Problem on Duration
Posted: September 15th, 2005, 6:17 am
by conocieur
A fixed-rate bond with a market value of 20 million and a duration of 4 is separated intothree bonds. Two of the bonds are floaters and the third is an inverse floater.You are given the following information with respect to the floaters:Floater Market Value Duration A 16 million 1 B 2 million 0.5Calculate the duration of the inverse floater.
Problem on Duration
Posted: September 15th, 2005, 4:06 pm
by Aaron
Think about it this way. If interest rates go up one basis point, the original bond will decline in price by four basis points or $8,000. Floater A will decline in price by 1 basis point or $1,600. Floater B will decline in price by 0.5 basis points or $100. So the inverse floater must decline in price by $8,000 - $1,600 - $100 or $6,300.The market value of the inverse floater is $20 million - $16 million - $2 million = $2 million. $6,300 / $2,000,000 = 0.00315 = 31.5 basis points. So the duration of the inverse floater must be 31.5.
Problem on Duration
Posted: September 15th, 2005, 6:12 pm
by balaji
Duration of a portfolio is the weighted average of durations of its constituents.