3233d - DURATION You must use LOTUS or another Spreadsheet...

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You must use LOTUS or another Spreadsheet software. You must turn in your diskette with the worksheet and your printed results. The Merchant's Bank and Trust Co. has $750,000 in bonds maturing from the existing portfolio. You have received interest rate forecasts from two well known investment firms. Firm A predicts short term interest rates, 0-6 months, to average between 3% to 5% . This same firm forecasted long term rates will fluctuate between 1% to 3% . Firm B predicts a downward sloping curve with long term interest rates in the 2% to 4% . Using Firm A and Firm B's forecast of long term interest rates and attached table: (1) Calculate the duration of each bond under Firm A and Firm B's forecast (use the average of each firm's long term interest range). (2) Construct a portfolio using the 4 bonds listed and calculate the portfolio's duration under Firm A's and Firm B's forecast. (3) Using the elasticity formula, what would be Firm A's portfolio value change if interest rates decrease 1% from Firm A's forecasted long-term average rate? Table Bond Being Considered for Purchase Amount * Name Coupon Rate Maturity $150,000 Agency A 10.90% three years $200,000 Government 1 10.85% three years $200,000 Agency D 11.35% five years $200,000
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This note was uploaded on 07/09/2011 for the course FIN 3233 taught by Professor Frohlich during the Spring '11 term at UNF.

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3233d - DURATION You must use LOTUS or another Spreadsheet...

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