Suppose that the current YTM is 10% and assume semi-annual compounding. We have a liability to...

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Suppose that the current YTM is 10% and assume semi-annual compounding. We have a liability to pay $10,000 in 3 years. In order to construct a hedged portfolio, we can use the bonds as follows: Bond Maturity (year) Coupon rate (%) Par value (S) Ae 12€ 1000 Be 1000 20 YTM The present value of the liability ($10,000) The total value of bond A a) Calculate the prices and the modified durations of bond A and B. b) We want to construct an asset portfolio by purchasing bond A and B in a way that the value and duration of the asset portfolio and the liability coincide (immunization). How many bonds do we need to buy? The total value of bond Be c) Suppose that yields suddenly drop from 10% to 9%. Construct a table for checking the performance of immunization. You can use the following table. Portfolio Value Hedged position (-Asset-liability) YTM (%) 12 100 (2 100 The frequency of coupon payments- semi-annual semi-annual 10¹ G t t P 2 P G 1 1 e Suppose that the current YTM is 10% and assume semi-annual compounding. We have a liability to pay $10,000 in 3 years. In order to construct a hedged portfolio, we can use the bonds as follows: Bond Maturity (year) Coupon rate (%) Par value (S) Ae 12€ 1000 Be 1000 20 YTM The present value of the liability ($10,000) The total value of bond A a) Calculate the prices and the modified durations of bond A and B. b) We want to construct an asset portfolio by purchasing bond A and B in a way that the value and duration of the asset portfolio and the liability coincide (immunization). How many bonds do we need to buy? The total value of bond Be c) Suppose that yields suddenly drop from 10% to 9%. Construct a table for checking the performance of immunization. You can use the following table. Portfolio Value Hedged position (-Asset-liability) YTM (%) 12 100 (2 100 The frequency of coupon payments- semi-annual semi-annual 10¹ G t t P 2 P G 1 1 e

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Okay lets solve this stepbystep a Calculate prices and modified duration... View the full answer