Assume today is October 21, 2019

1. 037833DG2 (Maturity 11/13/2047)
2. 023135AP1 (Maturity 12/05/2034)
3. 824348AS5 (Maturity 8/01/2045)
4. 931142CM3 (Maturity 4/15/2038)

Assume that you have a debt obligation of $14,000,000 due in 11 years. Further, assume that the current market interest rate (current yield) is 3.101% for all the bonds. Note that to make the computations easier and clear and let the debt be on the same scale as bonds, make the 15 Million
value in 10,000s. Therefore, to $14 m will become $1,400.

 Required
I. Which bond will be better suited to be used to hedge against our debt?
a. In answering this question, please use dduration function to find the duration of each bond and use this information as justification for the bond you selected. Further, go through estimating the bond price value at the end of the 11 years and the value of the reinvested coupons. Also, show how the values of the four bonds change as the yield varies between 1% to 20%, and use this information to prove your case as to why you picked the bond of your choice.

II. Select any two of the bonds that you didn’t select in the first stage, and prove that you can build a portfolio of bonds with these two bonds to hedge against the debt obligation, which may perform better than the individual bond you selected in part I.

III. Build a portfolio of the three bonds that you didn’t select in part I, and show that this portfolio can be a better hedge against our debt obligation.

Answer rating: 100% (QA)

To determine which bond would be better suited to hedge against the debt obligation we need to compare the durations of each bond and evaluate their p... View the full answer