To create a portfolio with a duration of 4 years using a 5 y

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

A. 50%

B. 55%

C. 60%

D. 75%

Solution

5 year is duration with respect to zero coupon bonds.

Equation as follows:

5WZ + (1- WZ) = 4

Portfolio to be invested is (WZ) = 3/4 i.e., 0.75 or 75%. hence its option D.