(A)
Adequate information:
The portfolio that is required to be managed is worth $1 million. The target duration stands to be 10 years. The manager has a choice of two bonds, perpetuity and 5 year maturity zero coupon bond.
To determine:
What proportion of the portfolio must be allocated towards the perpetuities and zero coupon bonds
Introduction:
Zero coupon bonds refer to the debt security that does not pay any interest payment and sold at a discount to the bondholder. It is the bond which does not make any periodic interest payment or coupon payment during its life rather it is sold at a price less than its face value. These bonds are redeemed at its face value and the difference is the profit earned by the bondholder.
(B)
To determine:
What proportion of the portfolio must be allocated towards the perpetuities and zero coupon bonds if target duration now account for 9 years
Introduction:
Zero coupon bonds refer to the debt security that does not pay any interest payment and sold at a discount to the bondholder. It is the bond which does not make any periodic interest payment or coupon payment during its life rather it is sold at a price less than its face value. These bonds are redeemed at its face value and the difference is the profit earned by the bondholder.
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