# Question: Suppose the yield curve is flat at 8 Consider 3

Suppose the yield curve is flat at 8%. Consider 3- and 6-year zero-coupon bonds.You buy one 3-year bond and sell an appropriate quantity of the 6-year bond to durationhedge the position. Any additional investment is in short-term (zero-duration) bonds.

Suppose the yield curve can move up to 8.25% or down to 7.75% over the course of 1 day. Do you make or lose money on the hedge? What does the result tell you about the (impossible) flat yield curve model discussed in Section 25.2?

Suppose the yield curve can move up to 8.25% or down to 7.75% over the course of 1 day. Do you make or lose money on the hedge? What does the result tell you about the (impossible) flat yield curve model discussed in Section 25.2?

**View Solution:**## Answer to relevant Questions

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 ...Consider the expression in equation (26.6). What is the exact probability that, over a 1-day horizon, stock A will have a loss? What are 95% and 99% 1-, 10-, and 20-dayVaRs for a portfolio that has $4m invested in stock A, $3.5m in stock B, and $2.5m in stock C? Suppose that in Figure 27.6 the tranches have promised payments of $160 (senior), $50 (mezzanine), and $90 (subordinated). Reproduce the table for this case, assuming zero default correlation. Suppose that there is a 3%per year chance that the firmâ€™s asset value can jump to zero. Assume that the firm issues 5-year zero-coupon debt with a promised payment of $110. Using the Merton jump model, compute the debt ...Post your question