You are a fixed income portfolio manager who manages a bond portfolio with the following characteristics. Total market value equals $200,000,000. Modified duration equals 7.0 years. Your return is compared to a bond index that has a modified duration of 5 years.
(a) If rates were to increase by 0.25%, what is the predicted impact on the return of your portfolio? What is the predicted impact on the return of the index?
(b) You hold $35,000,000 in face value of a bond with the following characteristics in your portfolio. Its price equals 100. Its accrued interest equals zero and its modified duration equals 12.5. You want to reduce the modified duration of your portfolio to the same modifed duration as the index to eliminate the interest rate risk. What amount of face value of that bond would you need to sell?