Maurice Tutor

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Category > Accounting Posted 21 Aug 2017 My Price 8.00

Maria VanHusen

23.   Text Box: www.mhhe.com/bkmSandra Kapple presents Maria VanHusen with a description, given in the following exhibit, of the bond portfolio held by the Star Hospital Pension Plan. All securities in the bond portfolio are noncallable U.S. Treasury securities.

 

STAR HOSPITAL PENSION PLAN BOND PORTFOLIO

 

 

Par Value (U.S. $)

 

 

Treasury Security

 

Market Value (U.S. $)

 

Current Price

Price if Yields Change

Up 100 Basis       Down 100 Points           Basis Points

 

Effective Duration

48,000,000

2.375% due 2006

48,667,680

101.391

99.245

103.595

2.15

50,000,000

4.75% due 2031

50,000,000

100.000

86.372

116.887

 

98,000,000

Total bond portfolio

98,667,680

—

—

—

 

 

a.   Calculate the effective duration of each of the following:

i.    The 4.75% Treasury security due 2031

ii.    The total bond portfolio

 

 

b.   VanHusen remarks to Kapple, “If you changed the maturity structure of the bond portfolio to result in a portfolio duration of 5.25, the price sensitivity of that portfolio would be identical to the price sensitivity of a single, noncallable Treasury security that has a duration of 5.25.” In what circumstance would VanHusen’s remark be correct?

Answers

Maurice Tutor
(5)
Status NEW Posted 21 Aug 2017 01:08 PM My Price 8.00

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