The CFO of Star Asset Management observes the current prices and characteristics of zero-coupon treasury bonds...

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The CFO of Star Asset Management observes the current prices and characteristics of zero-coupon treasury bonds as summarized in the following table. a. Compute the 4 year forward interest rate 3 years in the future, namely f;,.. b. Compute the convexity of the 5 year zero coupon bond (hint: for pure discount bonds, the convexity is a function of only the maturity and the yield to maturity of the bond.) c. Star has a portfolio of liabilities with a modified duration of 5.14. Star invests in a bond portfolio to fund the liabilities. If Star invests 15% of the portfolio in the 3 year zero, what proportion of the portfolio should be invested in the 5 year zero and in the 7 year zero to provide Star with good protection against the impact of a small parallel shift in the term structure of interest rates on both liabilities and assets (Hint: This is called "duration" matching)? d. If the 10-year yield shifts up by 0.2%, compute the estimated percentage change in the price of the 10 year zero using both modified duration and convexity of the 10 year zero. (Hint: first compute the modified duration of the 10 year zero, then compute the percentage change in price) The CFO of Star Asset Management observes the current prices and characteristics of zero-coupon treasury bonds as summarized in the following table. a. Compute the 4 year forward interest rate 3 years in the future, namely f;,.. b. Compute the convexity of the 5 year zero coupon bond (hint: for pure discount bonds, the convexity is a function of only the maturity and the yield to maturity of the bond.) c. Star has a portfolio of liabilities with a modified duration of 5.14. Star invests in a bond portfolio to fund the liabilities. If Star invests 15% of the portfolio in the 3 year zero, what proportion of the portfolio should be invested in the 5 year zero and in the 7 year zero to provide Star with good protection against the impact of a small parallel shift in the term structure of interest rates on both liabilities and assets (Hint: This is called "duration" matching)? d. If the 10-year yield shifts up by 0.2%, compute the estimated percentage change in the price of the 10 year zero using both modified duration and convexity of the 10 year zero. (Hint: first compute the modified duration of the 10 year zero, then compute the percentage change in price)

Answer rating: 100% (QA)

Answer a To compute the 4 year forward interest rate 3 years in the future we need to use the formula fs 1 yt43 1 where yt is the 3 year yield We can find the 3 year yield from the table provided yt 1... View the full answer