Consider the following bond portfolio: Bond Value Maturity A B C $300 million 3 300 400 years 4 8 Coupon 0% 6 Yield 10% 10 10 a) What is the bond portfolio's duration? b) Calculate the capital loss on this portfolio if the yield increases from 10 to 12 percent. c) Suppose the portfolio is to be immunized over an investment horizon of approximately 5.19 years. Determine the market value of the immunized portfolio at the end of 5.19 years.

Suppose the real risk-free rate of interest is r=4% and it is expected to remain constant over time. Inflation is expected to be 1.60% per year for the next two years and 3.90% per year for the next three years. The maturity risk premium is 0.1 x (t-1) %, where t is number of years to maturity, a liquidity premium is 0.45%, and the default risk premium for a corporate bond is 1.40%, The average inflation during the first 4 years is What is the yield on a 4-year Treasury bond? O 6.75% O 8.90% O 4.30% O 7.05% What is the yield on a 4-year BBB-rated bond? O 7.50% O 7.05 % O 8.45% 8.90% If the yield on a 5-year Treasury bond is 7.38% and the yield on a 6-year Treasury bond is 7.83%, the expected inflation in 6 years is (Hint: Do not round intermediate calculations.)

Assume you have a 1 year investment horizon. A bond has 10% year coupon rate and pays the coupon once per year. The bond matures in 10 years and is priced to yield 8% this year. If you expect the yield to maturity on the bond to be 7% at the beginning of the next year, what is your holding period return, assuming you have received the coupon for this year.

Suppose you are considering two possible investment opportunities: a 12-year Treasury bond and a 7-year, AA-rated corporate bond. The current real risk-free rate is 3%, and inflation is expected to be 2% for the next 2 years, 3% for the following 4 years, and 4% thereafter. The maturity risk premium is estimated by this formula: MRP = 0.02(t - 1)%. The liquidity premium (LP) for the corporate bond is estimated to be 0.3%. You may determine the default risk premium (DRP), given the company's bond rating, from the following table. Remember to subtract the bond's LP from the corporate spread given in the table to arrive at the bond's DRP.       Corporate Bond Yield   Rate Spread = DRP + LP U.S. Treasury 0.73 % — AAA corporate 0.93   0.20 % AA corporate 1.33   0.60   A corporate 1.75   1.02     What yield would you predict for each of these two investments? Round your answers to three decimal places. 12-year Treasury yield: 6.553%----->correct 7-year Corporate yield: ? %…

5 Year Treasury Notes are currently yielding 6.00%, and you have found the following interest premium that relate to this investment: • Inflation premium 1.75% • Liquidity premium 0.00% • Default risk premium 0.00% • Maturity risk premium 1.50% Given the above information, what is the real risk-free rate of return?

A short question 4) You are managing a portfolio of $1 million. Your target duration is 10 years, and you can choose from two bonds: a zero-coupon bond with maturity of 5 years, and a perpetuity*, each currently yielding 5%. a. How much of each bond will you hold in your portfolio? b. How will these ratios change next year if target duration is now 9 years? *: Perpetuity: a specal case of annuity, where n-> Inf, thus the maturity of the instrument is perpetual.

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