Question: You are given an initial term structure which is horizontal at 5% level. Suppose there exists a 2 year bond with 5% coupon and a

You are given an initial term structure which is horizontal at 5% level. Suppose there exists a 2 year bond with 5% coupon and a 6 year bond with 8% coupon paid annually. The goal of this exercise is to setup positions in the 2 year and 6 year bonds that will pay-o when the yield curve steepens and is insensitive to the overall level of interest rates

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