Suppose the yield spread between the 30 days Government Treasury bill rate and the three-month bank CD rate were 25 basis points. An investor has $5,000,000 to invest in either of these instruments for three months. How much does the investor surrender (give up) in total interest income for three months if he or she invests in Treasury bills instead of CDs? Does the investor receive any offsetting benefits by buying the Treasury bills and not the CDs? (10 marks)



b) What is the duration of a five-year, $1,000 Treasury bond with a 10 percent semiannual coupon selling with a YTM of 12 percent? (10 marks)



c) How useful is duration gap for risk management?

Answer rating: 100% (QA)

a To calculate the total interest income surrendered by investing in Treasury bills instead of CDs we need to determine the interest income difference ... View the full answer