A portfolio manager purchases $15m in corporate bonds with an ave duration of 6.5. 30% of this purchase was financed with debt, which has duration of 1.25. In addition, the manager longed $2m in bond futures that is currently exhibiting duration of 7.5. If interest rates were to fall by 50bp, what would be the effective duration of this portfolio? a) 5.46 b) 10.18 c) 5.53 d) 7.85
B
care to share the cal steps?
hazy - can you show the calculation? My answer is close to 10 but not exactly 10.18
10.18
15(6.5) + 2(7.5) - 4.5(1.25) all divided by 10.5 Duration Equity = Duration Assets(Assets) - Duration Liabilities(Liabilities) / Equity
In one step: (15m*6.5 - (15m*30%)*1.25 + 2m*7.5)/(15*70%) = 10.18 =)
6.5(15)-1.25(4.5)+7.5(2)/ 10.5 = 10.18 10.5 is the amount of equity he actually has put up, 70% of 15 million. Anyone else get this?
Why does the 50bp not impact any of the calculations in this questions?
50bp simply cancel out due to being in both numerator and denominator…
10.18…I was a bit hesitant about whether the 2 million in futures would affect the denominator.
yes b [(15)(6.5)-(4.5)(1.25)+(2)(7.5)]/10.5=10.18 all they asked for was effective duration. 50bp was to throw you off.
exactly