Question #10
Reading: Reading 25 The Term Structure and Interest Rate Dynamics
PDF File: Reading 25 The Term Structure and Interest Rate Dynamics.pdf
Page: 4
Status: Correct
Correct Answer: A
Part of Context Group: Q10-12
First in Group
Shared Context
Question
For this question only, imagine that the original yield curve undergoes a shift such that 3- month rates remain constant and all other rates increase by 135 basis points. The new value of portfolio 4 will be closest to:
Answer Choices:
A. $243,375,000
B. $229,750,000
C. $250,000,000
Explanation
Key Rate Durations
weight
3 mo
2 yr
5 yr
10 yr
15 yr
20 yr
25 yr
30 yr
Effective
Duration
Portfolio
1
0.10
0.03
0.14
0.49
1.35
1.71
1.59
1.47
4.62
11.40
Portfolio
2
0.20
0.02
0.13
1.47
0.00
0.00
0.00
0.00
0.00
1.62
Portfolio
3
0.15
0.03
0.14
0.51
1.40
1.78
1.64
2.34
2.83
10.67
Portfolio
4
0.25
0.06
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.06
Portfolio
5
0.30
0.00
0.88
0.00
0.00
1.83
0.00
0.00
0.00
2.71
Total
Portfolio
1.00
0.0265
0.3250
0.4195
0.3450
0.9870
0.4050
0.4980
0.8865
3.8925
Since the 3-month rate did not change, and all other key rate durations for Portfolio 4 are
zero, a 135 basis point change will have no effect on the value of Portfolio 4. Hence,
Portfolio 4 remains valued at $250,000,000.