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Objective: To form an optimal portfolio of target duration equal to 4.

52
Bond Yields on November 22, 2004
Trade Date
11/22/2004
Maturity
Bond 1
Bond 2
Bond 3

10/31/2006
11/15/2009
11/15/2014

Bond 4

2/15/2031

Coupon

Price*

Yield

2.5
3.5
4.25

99.05
99.23
100.18

2.947
3.565
4.180

5.38

107.25

4.870

0122 0.947% Treasury Price Dirty Price 99.9633 1.05 Yield Maturity 10/31/06 -1.85 Actual Price change -1.867 Total (Value of bond) Price 2.500% Period Disc.33 0. $ 0.867 3.33 Clean Price (dirty price .16 32nds 0.20 95.330 97.25 $1.23 1.704 Duration at yield of 3.496 95.05 Quoted Price 99.947% 1.Type of Bond Treasury Date FaceValue 100 Cash-Flow 04/30/05 10/31/05 4/30/06 10/31/2006 $1.25 $101.85% Estimated price change using duration -1.947% Price Change 99.85% -3.0124 0.867 1.00 Macaulay Duration (half-yr) Macaulay Duration (yr) Modified Duration 181 157 24 0.25 Calculations Act-days-betw-cpn Days to next cpn Acrrued-act-days Acrrued interest YTM Cpn 2.25 $1.85% Trade Date 11/22/2004 Weight (w) 1.22 1.17 2.947% 3.65% .68 99.0121 0.947% 4.accrued interest) 99.867 2.

51 13.03 3.02 0.86 2 6.89 1.Settlement Last-Cpn Date 11/24/04 10/31/04 w*t w*t*(t+1) 0.01 0.78 Convexity 1.46 .12 4.29 1801.73 3.

Type of Bond FaceValue Treasury 100 Date 05/15/05 11/15/05 05/15/06 11/15/06 05/15/07 11/15/07 05/15/08 11/15/08 05/15/09 11/15/09 Calculations Act-days-betw-cpn Days to next cpn Acrrued-act-days Acrrued interest YTM Cpn 3.02 1.95 1.75 9.05 0.6 0.13 8.95 1.51 Macaulay Duration (half-yr) 9.75 6.95 1.95 1.02 1.66 0.75 7.accrued 99.59% .95 1.12 0.03 0.02 1.95 85.50% Cash-Flow Period Disc.75 1.09 0.69 0.23 Yield Maturity Trade Date Settlement Last-Cpn Date 11/15/2009 11/22/04 11/24/04 11/15/04 Price Change 99.35 0.792 95.218 Duration at yield of 3.6 Modified Duration 4.565% 5.02 1.52% duration -4.41% -8.49 0.02 1.565% 0.72 0.21 Convexity Macaulay Duration (yr) 4.79 Clean Price (dirty price .71 interest) 32nds 0.09 3.947% 4.95 1.95 1.565% Treasury Price Dirty Price 99.58 0.75 5.08 0.52 Actual Price change -4.01 101.75 0.02 1.394 91.63 0.75 2.55 0.06 0.23 Quoted Price 99.02 0.86 Total (Value of bond)99.95 1.41% Estimated price change using-4.75 3.79 1 Price 3.75 8.565% 4.02 1.11 0. $ Weight (w) w*t 1.95 1.75 4.52 181 172 9 0.52 0.02 1.

23 65.19 9.36 31.06 9299.7 .52 108.19 23.73 19.21 133.15 85.w*t*(t+1) 3.91 47.

74 23.93 85.13 17.95 1.11 0.180% 6.06 -8.57interest) 32nds 0.13 15.8 0.26 0.02 2.02 2.180% Duration 109.67 Clean Price (dirty price .34 498.69 332.67 Total (Value of 100.3 38.02 2.47 221.06 0.88 0.7 128.07 455.02 2.25 0.13 16.29 56.95 2.86 11.02 2.95 1.96 0.23 0.95 2 0.4 Macaulay Duration (half-yr) 16.95 1.19 100.13 9.65 542.95 1.18% Treasury Price Dirty Price 100.02 0.86 28252.02 2.67 bond) 1 Calculations Act-days-betw-cpn Days to next cpn Acrrued-act-days Acrrued interest YTM Last-Cpn Date 11/15/04 0.02 2.28 157.1 371.13 13.95 1.69 0.13 19.22 0.77 0.02 2.53 0.17 0.13 8.68% w*t*(t+1) 3.26 .56 0.02 2.13 14.02 2.69% -14.11 4.2 0.44 0.27 77.16 0.24 0.47 0.06% -7.18 0.95 1.59 0.02 2.062 8.66 0.95 1.95 1. $ Weight (w) w*t 2.06 181 172 9 0.13 7.84 293.01 102.95 1.84 0.63 0.21 0.95 1.13 5.Type of Bond FaceValue Treasury 100 Date 05/15/05 11/15/05 05/15/06 11/15/06 05/15/07 11/15/07 05/15/08 11/15/08 05/15/09 11/15/09 5/15/2010 11/15/2010 5/15/2011 11/15/2011 5/15/2012 11/15/2012 5/15/2013 11/15/2013 5/15/2014 11/15/2014 Cpn Maturity Trade Date Settlement 4.7 101.46 Convexity Macaulay Duration (yr) 8.14 0.95 1.95 67.13 2.18 Yield Price 3.95 1.01 2.09 0.13 10.08 0.180% 4.13 12.13 11.89 Estimated price Actualchange Price change using duration of 8.95 1.02 2.180% 5.13 4.95 2.23 Modified Duration 8.04 0.13 6.accrued 100.02 2.5 77.46% 8.25% 11/15/14 11/22/04 11/24/04 Cash-Flow Period Disc.01 2.13 18.18 Quoted Price 100.95 1.02 2.67 92.92 0.27 13.02 2.13 0.73 0.04 0.95 1.02 2.08 0.95 1.13 1.13 3.94 413.06% 8.13 0.6 0.26 188.5 0.71 256.

Objective: To form an optimal portfolio of target duration equal to 4.00% 0.85% 3.95% 1.00% Portfolio Duration 0.52 23.214% .350% 0.592% -8. Portfolio 1 Bonds Bond 1 Bond 2 Bond 3 Yield 2.15% 1.95% 3.00% 100.86 4.06 77.52 Performance Change in Yield Portfolio 1 Portfolio 2 Difference 1% -4.7 8.46 57.00 4.18% 8.86 4.52 0.52 Optimal Portfolio 2 (maximize the convexity.377% 0. subject to the duration equal to target duration) Bonds Yield Duration Convexity Weight Portfolio Duration Bond 1 2.408% -4.00% 100.00 Bond 3 4.26 0.57% 4.00% 4.7 0.52 23.057% 2% -8.45 100.18% Duration Convexity Weight 1.00 4.06 77.26 42.52 Portfolio 1 100% in Bond 2 Portfolio 2: Maximizing convexity.07 Bond 2 3.00% 0.46 4.57% 4.

79% 35.00% 33.00% 23.70 3.48% .00 0.Portfolio Convexity Portfolio Yield 0.70 3.00 0.68% 0.57% 0.65 3.55 1.11 1.00 0.00% 23.57% arget duration) Portfolio Convexity Portfolio Yield 2.