Reference no: EM133059810
Q1. Consider the following par bond (ie coupon rate=yield):
Year 3 5 7 10Yld 0.83% 1.22% 1.45% 1.54%
Q1a. based on linear interpolation, what is the expected yield for a 10 year note ONE year later, assuming yield curve shape stays the same?
Q1b. how much should the 10y note be priced 1 year later (as a 9 year note)?
Q2. Consider 3 zero coupon bond:
Maturity Yld
5 1.50%
10 1.75%
20 2.25%
Q2a. calculate duration and convexity, dollar duration and dollar convexity for all three
Q2b. how to hedge the duration risk of a 100M position in 10Y with 5Y and with 20Y respectively?
Q2c. What is the total convexity for the 10Y long with 5Y hedge and with 20Y hedge respectively?
Q2d. What is the duration and convexity PnL for a 10 bps parallel movement upward AND downward respectively?
Q2e. What is the dur and convexity effect of 1 bps steepening for the 10 vs 5Y trade? (5Y up 50 bps; 10Y up 51 bps)?
hint: for duration effect, the first 50 bps for both maturities will cancel. for convexity effect, calculate convexity impacts for both legs separately and then sum up.
Q3. A Barbell
Q3a. what is the weight in 5Y and 20Y if you combine them in a way that matches the $dur of the 100M long 10Y position? This is known as a barbell position.
Q3b. what is the $convexity for the barbell?
Q3c. What is the $convexity for a long 100M 10Y and short barbell position?
Q3d. what is the pnl for a rotational move of the yield curve based on duration and convexity of each leg?
Maturity Yld_before Yld_after
5 1.50% 1.25%
10 1.75% 1.45%
20 2.25% 1.85%
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