Question

A bond portfolio named VEX comprises four bonds (face value=$1000):

1) 100 semi-annual bond, 5-year maturity, a coupon rate of 4%

2) 200 annual bonds, 30-year maturity, 8% coupon bond.

3) 300 zero-coupon bonds, 10-year maturity.

4) 400 zero-coupon bonds, 20-year maturity.

3. What is the time to maturity of VEX? Is VEX’s duration shorter or longer than its time to maturity? What is the meaning of VEX’s duration, how to interpret it?

Answer 1

Bond is a debt instrument which is created in order to raise capital and there are various types of bonds like : Fixed rate bonds, zero -coupon bonds, annual bonds, semi-annual bonds, Floating rate bonds etc whereas portfolio can be said as a grouping of various financial instruments like stock, bonds, commodities, mutual funds etc. So, from here we understand bond fortfolio means grouping of various types of bonds . VEX is a bond portfolio which comprises of annual , semi-annual and zero coupon bond.

Now , time to maturity of VEX can be calculated differently only for each bonds specified above as these are of different coupon rates and maturity period.

Time to maturity can be defined as the time duration for a bond to mature , or when it is good to go for the bond, ie face value is $ 1000 but after 5 years say it increases market value to $50,000.

VEX's duration can be longer. Now, interpreting maturity is a tough task . As the bonds with lower coupon rates are more riskier compared to higher coupon rates bond. Hence here , we need to study the economic condition and market condition and hence forth predict or interprete the maturity time. As far as Zero cupon bonds are considered it doesnot involve any coupon rate. So, we can conclude here VEX's duration can be longer as this portfolio involves even bonds which matures after 30 years also it incliudes zero coupon bonds.