Consider the Key Rates model with keys equal to 2, 5, 10, and 30 year forward...
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Consider the Key Rates model with keys equal to 2, 5, 10, and 30 year forward rates. Assume that currently all forward interest rates are equal to 6%. The KRO1s for 5, 7, 10, 16, and 30-year zero-coupon bonds are given in the table below. All bonds have $100 face values. Keep at least 6 decimal digits for all calculations!!! Bond 5-year 7-year 10-year 16-year 30-year KR012 0 0 0 0 0 KRO1s 0.036121 0.026958 0 0 0 KR01 10 0 0.017972 0.053755 0.042227 0 KR0130 0 0 0 0.018097 0.049437 a) (1.5 points) Find KR01s of a 2-year zero-coupon bond b) (2 points) Find KR01s of a 14-year zero-coupon bond c) (2 points) Using 2, 5, 10, and 30-year zero-coupon bonds, find the optimal hedging portfolio to hedge a portfolio that consists of 1,000 of 7-year zero-coupon bonds d) (2.5 points) Using 2, 5, 16, and 30-year zero-coupon bonds, find the optimal hedging portfolio to hedge a portfolio that consists of 1,000 of 7-year zero-coupon bonds Consider the Key Rates model with keys equal to 2, 5, 10, and 30 year forward rates. Assume that currently all forward interest rates are equal to 6%. The KRO1s for 5, 7, 10, 16, and 30-year zero-coupon bonds are given in the table below. All bonds have $100 face values. Keep at least 6 decimal digits for all calculations!!! Bond 5-year 7-year 10-year 16-year 30-year KR012 0 0 0 0 0 KRO1s 0.036121 0.026958 0 0 0 KR01 10 0 0.017972 0.053755 0.042227 0 KR0130 0 0 0 0.018097 0.049437 a) (1.5 points) Find KR01s of a 2-year zero-coupon bond b) (2 points) Find KR01s of a 14-year zero-coupon bond c) (2 points) Using 2, 5, 10, and 30-year zero-coupon bonds, find the optimal hedging portfolio to hedge a portfolio that consists of 1,000 of 7-year zero-coupon bonds d) (2.5 points) Using 2, 5, 16, and 30-year zero-coupon bonds, find the optimal hedging portfolio to hedge a portfolio that consists of 1,000 of 7-year zero-coupon bonds
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Answer rating: 100% (QA)
a To find KR01s of a 2year zerocoupon bond we need to find the sensitivity of the bonds price to a 1 basis point change in the 2year forward rate Sinc... View the full answer
Related Book For
Fundamentals of Financial Management
ISBN: 978-0324664553
Concise 6th Edition
Authors: Eugene F. Brigham, Joel F. Houston
Posted Date:
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