Coupon Maturity Asked Price Asked Yield (Note ) 6.5 Feb. 2010 119:03 3.50% (Note ) 3.0 Feb. 2011 109:20 3.35% (Strip ) 0 Feb. 2010 73:22 3.35% (Strip ) 0 Feb. 2011 73:03 3.77% (a) Suppose you buy the Feb. 2011 note and hold it to maturity. How much would you have to pay {approximately}? What cash flows would you receive, on what dates? (b) What are the spot interest rates for February 2010 and February 2011? (c) What is the forward rate of interest between February 2010 and February 2011? (d) Which of these securities has the shortest duration? Explain. 29 . Yankee Inc. has sold the Super Coupon Absolute Marvel (SCAM ) security to raise new funds. Unlike ordinary bonds, it pays no par valuefface value at the end of its life. It only pays coupons every year as follows: $100(1 + 0.05) at the end of year one, $100{1 + 0.05}2 at the end of year two, and so on. This security lasts for 4 years {i.e., makes 4 payments). The current interest rate is 5% for all maturities. (a) What is the price today of SCAM 1" (b) What is the duration today of SCAM ? (c) Yankee Inc. sold $10 million worth of SCAM. It plans to invest. the proceeds in two assets, A1 and A2, for the short run. A1 is a 12month TBill, whereas A2 is a 4year STRIPS. How much should Yankee lnc. invest in A] and A2 to avoid interest rate risks? 30. You manage a pension fund, and your liabilities consist of two payments as follows: $20 .31... Your assets are $18 million. The term structure is currently flat at 5%. (a) Compute the present value of your liabilities. (b} Compute modied duration of your liabilities (c) Compute an approximate change in the present value of your liabilities, using duration, when interest rates fall by 0.25%. (d) Suppose that you invest the $18 million in 1year Treasury bills {i.e., 1year zero coupon bond } and in a Treasury bond with modied duration of 20. How would you allocate your assets to avoid interest rate risk of your portfolio, which includes both assets and liabilities