May is a 45-year-old academic dean who has just inherited a large sum of money. Having knowledge on investment, she’s well aware of the concept of duration and decides to apply it to her bond portfolio. In particular, Jasmine intends to use P1 million of her inheritance to purchase Treasury bonds, she is considering four bonds: a. An 8.5%, 13-year bond that’s priced at P1,045 to yield 7.47% b. A 7.875%, 15-year bond that’s priced at P1,020 to yield 7.60% c. A 20-year stripped Treasury that’s priced at P202 to yield 8.22% d. A 24-year, 7.5% bond that’s priced at P955 to yield 7.90% Find the duration and the modified duration of each bond. Find the duration of the whole bond portfolio if Jasmine puts P250,000 into each of  the four Treasury bonds. Find the duration of the portfolio if Jasmine puts P360,000 each into bonds a and c  and P140,000 each into bonds b and d. Which portfolio—2 or 3—should Jasmine select if she thinks rates are about to head up and she wants to avoid as much price volatility as possible? Explain. From which portfolio does she stand to make more in annual interest income? Which portfolio would you recommend, and why?

CONCEPTS IN FED.TAX.,2020-W/ACCESS
20th Edition
ISBN:9780357110362
Author:Murphy
Publisher:Murphy
Chapter15: Choice Of Business Entity—other Considerations
Section: Chapter Questions
Problem 76P
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May is a 45-year-old academic dean who has just inherited a large sum of money. Having knowledge on investment, she’s well aware of the
concept of duration and decides to apply it to her bond portfolio. In particular, Jasmine intends to use P1 million of her inheritance to purchase Treasury bonds, she is considering four bonds:
a. An 8.5%, 13-year bond that’s priced at P1,045 to yield 7.47%
b. A 7.875%, 15-year bond that’s priced at P1,020 to yield 7.60%
c. A 20-year stripped Treasury that’s priced at P202 to yield 8.22%
d. A 24-year, 7.5% bond that’s priced at P955 to yield 7.90%

  1. Find the duration and the modified duration of each bond.
  2. Find the duration of the whole bond portfolio if Jasmine puts P250,000 into each of
     the four Treasury bonds.
  3. Find the duration of the portfolio if Jasmine puts P360,000 each into bonds a and c
     and P140,000 each into bonds b and d.
  4. Which portfolio—2 or 3—should Jasmine select if she thinks rates are about to head up and she wants to avoid as much price volatility as possible? Explain. From which
    portfolio does she stand to make more in annual interest income? Which portfolio
    would you recommend, and why?
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