# Question

Suppose the yield curve is flat at 6%. Consider a 4-year 5%-coupon bond and an 8-year 7%-coupon bond. All coupons are annual.

a. What are the prices and durations of both bonds?

b. Consider buying one 4-year bond and duration-hedging by selling an appropriate quantity of the 8-year bond. Any residual is financed with short-term (zero-duration) bonds. Suppose the yield curve can move up to 6.25% or down to 5.75% over the course of 1 day. What are the results from the hedge?

a. What are the prices and durations of both bonds?

b. Consider buying one 4-year bond and duration-hedging by selling an appropriate quantity of the 8-year bond. Any residual is financed with short-term (zero-duration) bonds. Suppose the yield curve can move up to 6.25% or down to 5.75% over the course of 1 day. What are the results from the hedge?

## Answer to relevant Questions

Consider two zero-coupon bonds with 2 years and 10 years to maturity. Let a = 0.2, b = 0.1, r = 0.05, σVasicek = 10%, and σCIR = 44.721%. The interest rate risk premium is zero in each case. We will consider a position ...Compute the 95% 10-day tail VaR for the position in Problem 26.8. In Problem 26.8. Compute the 95% 10-day VaR for a written strangle (sell an out-of-the-money call and an out-of-the-money put) on 100,000 shares of stock A. ...Using the same assumptions as in Example 26.3, compute VaR with and without the mean, assuming correlations of −1, −0.5, 0, 0.5, and 1. Is risk eliminated with a correlation of −1? If not, why not? Repeat the previous problem, only assuming that defaults are perfectly correlated. Suppose the firm has a single outstanding debt issue with a promised maturity payment of $120 in 5 years. Assume that bankruptcy is triggered by assets (which are observable) falling below $40 in value at any time over the ...Post your question

0