A three-year 10 % annual coupon bond has a continuously compounded yield of 13%.

(a) What is the bond price per $100 par? (b) What is its duration (D)? Explain the meaning of D. (c) Suppose the yield on the bond is expected to increase by 0.25%. Use the duration in (b) to estimate the effect of this yield change on the price of the bond. d) Suppose you own 100,000 units of this bond and wish to hedge it against the expected increase in yield by using bond futures with (i) a quote of 98-18, (ii) each futures contract is on $100,000 of bonds, and (iii) the cheapest-to-deliver bond has a duration of 6 years. How many futures contracts should you buy or sell?

Answer rating: 100% (QA)

a The bond price per 100 par can be calculated using the formula Bond price 100 1 Yield100Years Where Yield is the continuously compounded yield and Y... View the full answer