To create a portfolio with a duration of 4 years using a 5-year zero-coupon bond and a 3-year 8% annual coupon bond with a yield to maturity of 10%, one would have to invest ________ of the portfolio value in the zero-coupon bond.

Question

Quizplus · Accepted Answer

The duration of the 3-year bond is 2.78, as shown in the table below.
 11eaaae8_8b58_5d68_a4b8_c9770fd5ebad_TB6474_00 Then 5wZ + 2.78(1 − wZ) = 4
2.22wZ = 1.22
wZ = 0.5495

To Create a Portfolio with a Duration of 4 Years