In: Finance
Calculate the yield to maturity and the duration of the following portfolio of bonds.
one year T-bill yielding 4.65%
Three-year AAA-rated bond paying semiannual coupons at 5% with a yield of 5.25%
Two-year BBB-rated bonds paying semiannual coupons at 5.5% with a yield of 6.75%
Part 1: One year Treasury Bill
Yield is given as 4.65%. Hence YTM is 4.65%
Being issued for discount (no coupon), Duration is equal to term to maturity. Hence the Duration= 1 year.
Part 2: AAA Rated Bond
Yield is given as 5.25%. Hence YTM is 5.25%
Duration is ascertained at 2.82219 years as follows:
Part 3: BBB Rated Bond
Yield is given as 6.75%. Hence YTM is 6.75%
Duration is ascertained at 1.92008 years as follows: