Julie is the portfolio manager at know better plc. She wants to estimate the interest rate risk of assets of the company consisting of 1 million shares of Bond A, 2 million shares of Bond B, and 2 million shares of Bond C. The duration of Bond A is 5.59, a valuation model found that if interest rates decline by 30 basis points, the value of Bond A will increase to 83.5 pounds, and if interest rates increase by 30 basis points, the value of Bond to A will decline to 80.75 pounds. The same valuation model also found that if interest rates decreases by 50 basis points, the value of Bond B increases to 104.6 pounds, and if interest rates increases by 50 basis points, the value of Bond B decreases to 96.4 pounds, and the current value of Bond B is 100 pounds. Kirstin also knows from the valuation model that, by using the duration and convexity rule, if interest rates decline by 1%, the price of bond C increases approximately by 8.46 pounds, and if interest rates increase by 3%, the price of Bond C decreases approximately by12.77 pounds. The convexity of Bond C is 300. a ) What is current value of the bond portfolio?

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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Julie is the portfolio manager at know better plc. She wants to estimate the interest rate risk of assets of the company consisting of 1 million shares of Bond A, 2 million shares of Bond B, and 2 million shares of Bond C. The duration of Bond A is 5.59, a valuation model found that if interest rates decline by 30 basis points, the value of Bond A will increase to 83.5 pounds, and if interest rates increase by 30 basis points, the value of Bond to A will decline to 80.75 pounds. The same valuation model also found that if interest rates decreases by 50 basis points, the value of Bond B increases to 104.6 pounds, and if interest rates increases by 50 basis points, the value of Bond B decreases to 96.4 pounds, and the current value of Bond B is 100 pounds. Kirstin also knows from the valuation model that, by using the duration and convexity rule, if interest rates decline by 1%, the price of bond C increases approximately by 8.46 pounds, and if interest rates increase by 3%, the price of Bond C decreases approximately by12.77 pounds. The convexity of Bond C is 300.

a ) What is current value of the bond portfolio? 

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