Question #12 - 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: 5

Status: Incorrect

Correct Answer: A

Your Answer: B

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 effective duration for Portfolio 2 is closest to:

Answer Choices:

A. 1.47

B. 0.023

C. 1.62

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 effective duration for any individual issue is the sum of the individual key rate durations for that issue. For Portfolio 2, the effective duration is: 0.02 + 0.13 + 1.47 = 1.62

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