Question: The table below shows the current data for the 1yr T-bill and the 5yr T-note. Suppose I believe the spread between them will flatten (or

The table below shows the current data for the 1yr T-bill and the 5yr T-note. Suppose I believe the spread between them will flatten (or decrease). Use the DV 01 to construct a trade where you profit if the spread flattens and breaks even if doesnt change, suppose you can only short-sell $10 MM of par value of any bond. Be specific which bond you buy and which one you short-sell. Suppose the YTM of the 5yr T-note decreases 20 basis points while the YTM of the 1yr T-bill stays the same (thus the spread narrows), show your strategy makes a profit.

Bond Coupon Rate YTM 1yr T-bill 0.00% 1.06% 5yr T-note 1.875% 1.74%

(please SHOW work and dont use excel!!)

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