Consider the following securities: Security A is a 2-year zero which matures two years from today,...
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Consider the following securities: Security A is a 2-year zero which matures two years from today, and pays $1 at maturity; • Security B is a 3-year zero which matures three years from today, and pays $1 at maturity; My portfolio currently consists of a long position of 5,000 units of security B and a short position (liability) of 3,000 units of security A. The current term structure based on zero coupon bonds (with 1-, 2-, 3-, and 4-year maturity from today) in annualized rates with continuous compounding is: R(0, 1) = 3% R(0, 2) = 5% R(0, 3) = 6% R(0, 4) = 7% What are the current value, the dollar duration and the convexity of my portfolio? Interpret the dollar duration and the convexity numbers (i.e. for a 100 basis point parallel increase in the term structure, what do the duration and convexity numbers say?). Hint: Find the yield to maturity of the portfolio first. Consider the following securities: Security A is a 2-year zero which matures two years from today, and pays $1 at maturity; • Security B is a 3-year zero which matures three years from today, and pays $1 at maturity; My portfolio currently consists of a long position of 5,000 units of security B and a short position (liability) of 3,000 units of security A. The current term structure based on zero coupon bonds (with 1-, 2-, 3-, and 4-year maturity from today) in annualized rates with continuous compounding is: R(0, 1) = 3% R(0, 2) = 5% R(0, 3) = 6% R(0, 4) = 7% What are the current value, the dollar duration and the convexity of my portfolio? Interpret the dollar duration and the convexity numbers (i.e. for a 100 basis point parallel increase in the term structure, what do the duration and convexity numbers say?). Hint: Find the yield to maturity of the portfolio first.
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The current value of the portfolio can be calculated by discounting the cashflows at the approp... View the full answer
Related Book For
Corporate Finance
ISBN: 978-0077861759
10th edition
Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe
Posted Date:
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