Question #11 - Reading 25 The Term Structure and Interest Rate Dynamics

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

Shared Context

- 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: A) $243,375,000. B) $229,750,000. C) $250,000,000.

Question

The 10-year key rate duration for the total portfolio is closest to:

Answer Choices:

A. 1.350

B. 0.345

C. 1.375

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 The total portfolio key rate duration for a specific maturity is the weighted value of the key rate durations of the individual issues for that maturity. In this case, the 10-year key rate duration for the portfolio is: (0.10)(1.35) +(0.20)(0.00) + (0.15)(1.40) + (0.25)(0.00) + (0.30)(0.00) = 0.345

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