# dur - 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 1% to 3% . This same firm forecasted long term rates will fluctuate between 3% to 5% . Firm B predicts a downward sloping curve with short term interest rates in the 2% to 4% . Using Firm A and Firm B's forecast of short 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 Face Amount * Name Coupon Rate Maturity \$150,000 Agency A 5% three years \$200,000 Government 1 4% three years \$200,000 Agency D 6.5% five years \$200,000

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## This note was uploaded on 07/09/2011 for the course FIN 4504 taught by Professor Banko during the Summer '08 term at University of Florida.

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dur - DURATION You must use LOTUS or another Spreadsheet...

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