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Below you can find three bonds with the following features: Bonds Bond A Bond B Bond C Maturity YTM (%) Duration Convexity 3 years 9.5 2.70 0.1 10 years 10.0 9.15 0.6 20 years 9.0 15.6 1.8 Consider

Below you can find three bonds with the following features: Bonds Bond A Bond B Bond C Maturity YTM (%) Duration Convexity 3 years 9.5 2.70 0.1 10 years 10.0 9.15 0.6 20 years 9.0 15.6 1.8 Considertwo portfolios: Portfolio 1: 100% Bond B Portfolio 2: 50% Bond A and 50% Bond C a) Calculate 1-year total return of the two portfolios when there is a downward 100 bps "parallel shift" in the yield curve. Which portfolio has a greater return? b) Calculate 1-year total return of the two portfolios where the yield on bond A rises 50 bps, yield on bond C falls 50 bps and yield on bond B does not change. As we noted earlier, such a nonparallel shift means a "flattening" of the yield curve. Which portfolio has a greater return?

Apr 17 2021 View more View Less

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