Financial Risk Manager Part 1
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A portfolio manager is assessing the impact of changes in yields on two specific portfolios: Portfolio ASD and Portfolio BTE. Portfolio ASD includes two zero-coupon bonds, while Portfolio BTE contains a single zero-coupon bond. The following table provides additional details about these portfolios:
| Portfolio | Components | Yield Per | Maturity (Years) | Face Value |
|---|---|---|---|---|
| Portfolio ASD | Bond 1 | 10% | 3 | USD 1,000,000 |
| Portfolio ASD | Bond 2 | 10% | 9 | USD 1,000,000 |
| Portfolio BTE | Bond 3 | 8% | 6 | USD 1,000,000 |
To assess the potential impact of a parallel shift in the yield curve on these portfolios, the manager performs a scenario analysis assuming an increase in yields by 200 basis points across the yield curve. Additionally, the convexity for Portfolio ASD is calculated to be 34.51, while the convexity for Portfolio BTE is 36.00. Based on the assumption of continuous compounding, determine the most accurate estimates for the decrease in the values of both portfolios due to the combined effects of duration and convexity.