You are the investment manager of a fixed income portfolio consisting of the following bonds (Values and duration): (Note duration is the weighted average maturity of a bond or bond portfolio.)
Bond A $100,000,000 7
Bond B $80,000,000 12
Bond C $60,000,000 4
What is the duration of the portfolio?
Your view is that interest rates are going to decline. If the above bonds are the only viable bonds available in the market, and you can sell one bond and buy an equivalent amount of the other, which would you sell and which would you buy?
What is the composition and duration of the new portfolio?