a) What is the yield to maturity for the T Bill?
b) Calculate the Macaulay duration of each of the securities, and the Macaulay
duration of the portfolio?
c) If your friend has an investment horizon of 3 years and wants to sell the portfolio at
that time to use the principal + interest, what recommendations would you make
regarding the composition of the portfolio?
d) Using Excel Solver show how much would need to be invested in each instrument
to obtain a portfolio Macaulay duration of 3.25 years. There are the following
constraints.
1 The total investment should not change.
2 The same amount needs to be held in cash
3 A total of $100,000 market value needs to be invested in the T Bill and $20,000 in the
Aa Bond.
4 Yield is maximized.
NB Work on numbers in the above portfolio table.
e) Is default risk a major concern for this portfolio?
f) The Baa rated bond has just been re-rated by one of the rating agencies and this
has the impact of reducing its yield to maturity by 5 basis points. If at the same time
there is a general change in interest rates so that yields fall across the whole of the
yield curve by 20 basis points (including the rerated bond), what is the new value of
the portfolio?