An investor holds 1,000 units of a bond whose features are summarized in the following table....
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
An investor holds 1,000 units of a bond whose features are summarized in the following table. He wishes to be hedged against a rise in interest rates. Maturity Coupon rate YTM Face value $100 4 Years 5% 4% Characteristics of the hedging instrument, which is a bond here, are as follow: Maturity Coupon rate YTM Face value $100 5 Years 4% 3% Coupon frequency and compounding frequency are assumed to be annual. a. Calculate the modified durations for the two bonds. b. What is the quantity of the hedging instrument that the investor has to sell? c. Suppose that the YTM increases instantaneously by 0.1%, what happens if the bond is not hedged? What happens if the bond is hedged as above? An investor holds 1,000 units of a bond whose features are summarized in the following table. He wishes to be hedged against a rise in interest rates. Maturity Coupon rate YTM Face value $100 4 Years 5% 4% Characteristics of the hedging instrument, which is a bond here, are as follow: Maturity Coupon rate YTM Face value $100 5 Years 4% 3% Coupon frequency and compounding frequency are assumed to be annual. a. Calculate the modified durations for the two bonds. b. What is the quantity of the hedging instrument that the investor has to sell? c. Suppose that the YTM increases instantaneously by 0.1%, what happens if the bond is not hedged? What happens if the bond is hedged as above?
Expert Answer:
Answer rating: 100% (QA)
a To calculate the modified duration for each bond you can use the following formula Where Macaulay Duration is the weighted average time to receive t... View the full answer
Related Book For
Introduction to Operations Research
ISBN: 978-1259162985
10th edition
Authors: Frederick S. Hillier, Gerald J. Lieberman
Posted Date:
Students also viewed these finance questions
-
You found a spare DC motor in TechSpark and decided to use it to create a power assist system for your skateboard. You look up the data sheet for the motor and find the following information: -...
-
Homework-2 DECISION ANALYSIS PROBLEMS Problem-1: Kenneth Brown is the principal owner of Brown Oil, Inc. After quitting his university teaching job, Ken has been able to increase his annual salary by...
-
Micky Mouse sells property with a basis of $45,000 and a FMV of $50,000 to his son Mick Jr. on January 1, 20X1. Mick Jr. gives $50,000 note, paid in $10,000 installments in the years 20X1, 20X2,...
-
Again review information about your own university. Create generalization/specialization hierarchies using the domain model class diagram notation for (1) Types of faculty, (2) Types of students, (3)...
-
A swimming pool W by Y by h deep is to be emptied by gravity through the long pipe shown in Fig. P6.54. Assuming an average pipe friction factor fav and neglecting minor losses, derive a formula for...
-
Explain the difference in boiling points between 1-butanol and ethanol in terms of the intermolecular forces.
-
A four-stroke, four-cylinder spark ignition engine has the following data : Piston diameter \(=100 \mathrm{~mm} ;\) Engine runs at a speed of \(800 \mathrm{rpm}\); Length of stroke \(=200...
-
Corning-Howell reported taxable income in 2011 of $120 million. At December 31, 2011, the reported amount of some assets and liabilities in the financial statements differed from their tax bases as...
-
Would others view you as an ethical leader? Please explain what traits you possess or behaviors you demonstrate (or the lack of) to support your reasoning of being an ethical leader. Please provide...
-
Wedding Planners Limited (WP), owned by Anne and Francois Tremblay, provides wedding planning and related services. WP owns a building (the Pavilion) that has been custom-made for hosting weddings....
-
What is one method companies might use to keep external stakeholders happy? Offer development opportunities Offer lavish amenities Practice an ethical maximum Offer higher pay and benefits
-
Discuss the implications of principal-based regulation for financial markets and regulatory compliance. How do regulatory authorities, such as financial regulators and securities exchanges, implement...
-
Explain what types of markets are stocks traded in? Name 3 well known stock markets in the U.S. What are 2 forms of efficiencies? Name 1 forms that makes up the efficient market hypothesis. What...
-
The price p (in dollars) and the demand x for a particular clock radio are related by the equation x = 5000 - 50p. (A) Express the price p in terms of the demand x, and find the domain of this...
-
Ensuring Payment for Products Exported by the Sports Exports Company The Sports Exports Company produces footballs and exports them to a distributor in the United Kingdom. It typically sends...
-
Evaluate the role of principal in financial transactions, such as loans, bonds, and investments. How does the principal amount represent the initial capital invested or borrowed, and how is it...
-
Use Exercise 88 to prove that if a < b and a/b is near 1 (a nearly circular ellipse), then L = (3+) 2 b Hint: Use the first two terms of the series for G(k).
-
Kims Konstructions has assembled the following data for a proposed straw-reinforced brick maker (SRBM): SRBM Cost: $26,000 Life: 5 years Revenue (p.a.) $11,000 Operating Expenses (p.a.) $3,000...
-
The life of electric lightbulbs is known to be a normally distributed random variable with unknown mean and standard deviation 200 hours. The value of a lot of 1,000 bulbs is (1,000) (1/5,000) ...
-
The Profit & Gambit Co. has a major product that has been losing money recently because of declining sales. In fact, during the current quarter of the year, sales will be 4 million units below the...
-
Consider the assignment problem formulation of Option 2 for the Better Products Co. problem presented in Table 9.29. (a) Reformulate this problem as an equivalent transportation problem with three...
-
Reflect on how the 'pair-wise' criterion system could be applied in your organisation. Against which criterion would you carry out prioritisation?
-
Explain the role projects play in the delivery of an organisation's strategy
-
Using the BCG matrix illustrated in Figure 4. 13 review the investments from the list below. Investment $\mathrm{A}$ is a new product that has been released into the industry. It seems to be...
Study smarter with the SolutionInn App