Use the following information to solve this problem.

Issue Price Yield to Maturity Modified Duration*

U.S. Treasury bond 11¾% maturing Nov. 15, 2035 100 11.75% 7.6 years U.S. Treasury long bond futures contract

(contract expiration in 6 months)

 63.33 11.85% 8.0 years XYZ Corporation bond 12½% maturing June 1, 2030

(sinking fund debenture, rated AAA)

93 13.50% 7.2 years Volatility of AAA corporate bond yields relative to U.S. Treasury bond yields = 1.25 to 1.0 (1.25 times)

Assume no commission and no margin requirements on U.S. Treasury long bond futures contracts. Assume no taxes.

One U.S. Treasury bond futures contract is a claim on $100,000 par value long-term U.S.

Treasury bonds.

*Modified duration = Duration/(1 + y) P-63