Question: Suppose there are two bonds, a 30-year zero coupon bond and a 2-year zero coupon bond. Currently, the discount rate, y, is 4%. Suppose the

Suppose there are two bonds, a 30-year zero coupon bond and a 2-year zero coupon bond. Currently, the discount rate, y, is 4%. Suppose the par value of the 30-year zero coupon bond is $1000, and we short one share of the 30-year zero coupon bond. 



How much of the 2-year zero coupon bond do we need to buy to be approximately immunized from changes in interest rates?

Step by Step Solution

★★★★★

3.44 Rating (160 Votes )

There are 3 Steps involved in it

1 Expert Approved Answer
Step: 1 Unlock

Change in Bond Price 1 Duration X Change in Yield Now duration ... View full answer

blur-text-image
Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock
Step: 3 Unlock

Students Have Also Explored These Related Finance Questions!

Q:

A feed mixture containing 50 wt% n-heptane and 50 wt% methylcyclohexane (MCH) is to be separated by liquid-liquid extraction into one product containing 92.5 wt% methylcyclohexane and another...

Q:

Managing Scope Changes Case Study Scope changes on a project can occur regardless of how well the project is planned or executed. Scope changes can be the result of something that was omitted during...

Q:

Suppose there are two bonds, a 30-year zero coupon bond and a 2-year zero coupon bond. Currently, the discount rate, y, is 4%. Suppose we are short $1000 in par value of the 30-year zero coupon bond....

Q:

KYC's stock price can go up by 15 percent every year, or down by 10 percent. Both outcomes are equally likely. The risk free rate is 5 percent, and the current stock price of KYC is 100. (a) Price a...

Q:

Suppose there are two bonds, a 30-year zero coupon bond and a 2-year zero coupon bond. Currently, the discount rate, y, is 4%. Suppose we are short $1000 in par value of the 30-year zero coupon bond....

Q:

Suppose there are two bonds, a 30-year zero coupon bond and a 2-year zero coupon bond. Currently, the discount rate, y, is 4%. Suppose we are short $1000 in par value of the 30-year zero coupon bond....

Q:

Suppose there are two bonds, a 30-year zero coupon bond and a 2-year zero coupon bond. Currently, the discount rate, y, is 4%. Suppose we are short $1000 in par value of the 30-year zero coupon bond....

Q:

Suppose there are two bonds, a 3 0 - year zero coupon bond and a 2 - year zero coupon bond. Currently, the discount rate, y , is 4 % . Suppose we are shorting $ 1 0 0 0 in par value of the 3 0 - year...

Q:

. Suppose there are two bonds, a 30-year zero coupon bond and a 2-year zero coupon bond. Currently, the discount rate, y, is 4%. Suppose we are shorting $1000 in par value of the 30-year zero coupon...

Q:

When interest rate goes up, which of the following is true? Bond price will go down Bond coupon rate will go up Bond maturity will become longer None of the above is sure 2. Suppose there are two...

Q:

Suppose there are two bonds, a 30-year zero coupon bond and a 2-year zero coupon bond. Currently, the discount rate, y, is 4%. Suppose we are short $1000 in par value of the 30-year zero coupon bond....

Q:

Firms A and B both operate under duopolistic competition with constant marginal costs of 2. The demand function of the market is Q = 300 - 25P. a. b. C. Assume first that firm A and B are aware of...

Q:

In 2008 through 2011, the value of precious metals fluctuated dramatically. The data in the following table represent the yearly rate of return (in percentage) for platinum, gold, and silver from...

Q:

Given the outlook presented in the case study, the agricultural sector including growers, producers, and supply chain stakeholders is expected to face continued challenges in the coming years,...

Q:

Defined the structure C,H1002 1719 Problem 6: C;H3N 2008 4000

Q:

Which of the following statements is FALSE? (You can choose more than one answer) Gas doesn't have a definite volume or shape. The temperature at which the solid start changing to liquid is the...

Q:

In atomic spectroscopic techniques, flames and furnaces are commonly used to atomize the samples. Furnaces are better than :the flames because of Furnaces can work with the refractory elements but...

Q:

CNOOSE Lhe sentENce in which prepositions, adverbs, or phrasal verbs are used correctly. We were looking to the A town beneath us from the top of the building. If you don't behave, B you'll get...

Q:

which prepositions, adverbs, or phrasal verbs are used correctly. You better make a summary of what you need to study. The cat has been hiding at the bed for a while now. There are some C cookies in...

Q:

Which of the following stems from poor job descriptions or unclear cues from coworkers?Intrarole conflictRole ambiguityIntrasender conflictRole overload

Q:

In this exercise, treat the real interest rate r as identical to the the rental rate on capital. A. We will now consider the responsivenessor elasticityof savings and borrowing behavior with respect...

Q:

Suppose you just won $10,000 in the lottery. You decide to put it all in a savings account. A: Bank A offers you a 10% annual interest rate that compounds annually, while Bank B offers you a 10%...

Q:

Suppose the only two goods in the world are peanut butter and jelly. A: You have no exogenous income but you do own 6 jars of peanut butter and 2 jars of jelly. The price of peanut butter is $4 per...

Q:

Explain the psychological bias that causes peoples decisions to be affected by default rules or the endowment effect.

Q:

Clocky is a commitment device to help overcome time inconsistency. Which of the following are the time periods over which someone might have inconsistent preferences and need Clockys help? a. Between...

Q:

How much should someone with time-inconsistent preferences be willing to pay for Clocky? a. Nothing, because a regular alarm will work just as well. b. Something, because Clocky increases his utility...