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1. | i-expl-T/7) expl-T)] 7 a. (8 marks) We consider the Nelson Siegel model: R (0,1)=B+B [1-exp(-T/1) -B T/T T/ Suppose at today, the model is calibrated that gives the following parameters: B. B B2 3% 2% 1% 3 A manager holds a coupon bond (Bond A). Coupons are assumed to be paid semi- annually, and the face value is $100. Other details of Bond A: Maturity (years) Coupon rate (%) Bond A 5 2 Calculate the yield-to-maturity (semi-annual compounding convention) of Bond A. b. (6 marks) Please explain why we say that the form of the Nelson Siegel model agrees with the empirical results from PCA analysis of zero rates. c. (6 marks) In chapter 3, we have discussed how to use Nelson Siegel model to hedge interest rate risks. Please discuss the limitations of this hedging method in managing interest rate risks for a bond portfolio. 1. | i-expl-T/7) expl-T)] 7 a. (8 marks) We consider the Nelson Siegel model: R (0,1)=B+B [1-exp(-T/1) -B T/T T/ Suppose at today, the model is calibrated that gives the following parameters: B. B B2 3% 2% 1% 3 A manager holds a coupon bond (Bond A). Coupons are assumed to be paid semi- annually, and the face value is $100. Other details of Bond A: Maturity (years) Coupon rate (%) Bond A 5 2 Calculate the yield-to-maturity (semi-annual compounding convention) of Bond A. b. (6 marks) Please explain why we say that the form of the Nelson Siegel model agrees with the empirical results from PCA analysis of zero rates. c. (6 marks) In chapter 3, we have discussed how to use Nelson Siegel model to hedge interest rate risks. Please discuss the limitations of this hedging method in managing interest rate risks for a bond portfolio