Answer: 5.8

The modified duration of a bond portfolio is calculated as the weighted average of the modified durations of the individual bonds, using the market values of the bonds as weights. 1. **Calculate the modified durations of the individual bonds**: - Bond 1: Money Duration / Market Price = 730 / 95 ≈ 7.6842 - Bond 2: Money Duration / Market Price = 515 / 120 ≈ 4.2917 2. **Determine the market values of the bonds**: - Bond 1: €25 million × (95 / 100) = €23,750,000 - Bond 2: €25 million × (120 / 100) = €30,000,000 3. **Calculate the weights of each bond in the portfolio**: - Weight of Bond 1: €23,750,000 / (€23,750,000 + €30,000,000) ≈ 44.186% - Weight of Bond 2: €30,000,000 / (€23,750,000 + €30,000,000) ≈ 55.814% 4. **Compute the portfolio's modified duration**: - (44.186% × 7.6842) + (55.814% × 4.2917) ≈ 3.3953 + 2.3953 ≈ 5.7906, rounded to **5.8**. Option B incorrectly assumes the weighted average of the money durations divided by 100, while Option C incorrectly uses an equal-weighted average of the money durations.

Author: LeetQuiz Editorial Team