Recall that Yield Curve is the graph of bond yields as a function of their maturity...
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Recall that Yield Curve is the graph of bond yields as a function of their maturity (2y, 3y, 5y, 10y, ...). Assume a 2-year bond with semi-annual coupon rate of 2.25% p.a. has semi-annual yield of 2% p.a., and a 10-year bond with semi-annual coupon rate of 2.5% p.a. has semi-annual yield of 3% p.a. (a) Calculate the PV01 of each bond. (b) Assume you own $10M face value of the 2-year bond, and want to protect (hedge) yourself against parallel shifts in the yield curve by shorting the 10-year bond. How much face value of the 10-year bond do you need to sell short? (c) What is the Profit and Loss (P&L) of your combined (long+short) position due to a 10 bp parallel shift: the 2-year and 10-year bond yields both increase by 10 bp's (10 x 0.0001)? (d) What is your P&L due to a 10 bp steepening: the 10-year yield change is 10 bp's more than 2-year yield's change? (Assume 2-year yield change is 0.) Recall that Yield Curve is the graph of bond yields as a function of their maturity (2y, 3y, 5y, 10y, ...). Assume a 2-year bond with semi-annual coupon rate of 2.25% p.a. has semi-annual yield of 2% p.a., and a 10-year bond with semi-annual coupon rate of 2.5% p.a. has semi-annual yield of 3% p.a. (a) Calculate the PV01 of each bond. (b) Assume you own $10M face value of the 2-year bond, and want to protect (hedge) yourself against parallel shifts in the yield curve by shorting the 10-year bond. How much face value of the 10-year bond do you need to sell short? (c) What is the Profit and Loss (P&L) of your combined (long+short) position due to a 10 bp parallel shift: the 2-year and 10-year bond yields both increase by 10 bp's (10 x 0.0001)? (d) What is your P&L due to a 10 bp steepening: the 10-year yield change is 10 bp's more than 2-year yield's change? (Assume 2-year yield change is 0.)
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a The weightedaverage cost of capital WACC is the average of the cost of equity and cost of debt weighted by their respective proportions in the capital structure The WACC of Alpha Best Corporation ca... View the full answer
Related Book For
Exploring Engineering An Introduction to Engineering and Design
ISBN: 978-0123747235
2nd edition
Authors: Philip Kosky, George Wise, Robert Balmer, William Keat
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