Has anyone found that the long-winded solution provided by Schweser for Question 45 is quite stupid? I mean, c’mon, on exam date, who will have the time to perform all those calculations which show a circuitous way of solving a very simple problem. If we know the change in dollar duration is $15,105, and we know to use Bond 1 with a duration of 4.5, we simply need to divide $15,105 by 4.5% to arrive at $335,667 (the answer). By definition of duration, bond 1 changes in value by 4.5% for a 1% change in interest rates. Why make something so simple so complicated! Ugh! ---------- V1 Exam 2 Afternoon Test Thomas is analyzing the portfolio for one of his investors, Canopy Managers. Last year the portfolio had a market value of $4,881,000 and a dollar duration of $157,200. The current figures for the portfolio are provided below: Market Value Duration Dollar Duration Bond 1 $780,000 4.5 $35,100 Bond 2 $2,500,000 3.4 $85,000 Bond 3 $524,000 2.7 $14,148 Bond 4 $413,000 1.9 $7,847 Portfolio $4,217,000 $142,095 Canopy would like to alter the current dollar duration of the portfolio to last year’s duration, and they would like to do so with the least amount of cash possible and a controlling position in one of the bonds. To adjust the dollar duration of the Canopy portfolio to last year’s level, the amount Canopy will need to purchase of Bond 1, acting as a controlling position, is closest to: ---------- To return the portfolio to its original dollar duration, the manager could purchase additional amounts of each bond. Alternatively, the manager could select one of the bonds to use as a controlling position. Since the dollar duration has fallen and Bond 1 has the longest duration, the manager could use the least amount of additional cash by increasing only the holding in Bond 1 (i.e., using Bond 1 as the controlling position): desired increase in DD = target DD − current DD = $157,200 − $1,42,095 = $15,105 increase in Bond 1: new DD of Bond 1 = $35,100 + $15,105 = $50,205 required new value of Bond 1 = $50,205 × $780,000 = $1,115,667 $35,100 Thus, the manager could purchase another $335,667 (= $1,115,667 - $780.000) of Bond 1. The new portfolio total value will be $4,217,000 + $335,667 = $4,552,667, and the portfolio dollar duration will be back to its original level: DDnew = $1,115,667(4.5) + $2,500,000(3.4) + $524,000(2.7) + $413,000(1.9) = $5,020,501.50 + 8,500,000 + $1,414,800 + $784,700 = $15,720,002(0.01) = $157,200 = DDOriginal