Bond A has a DV01 of $.10 per $100 face value.

Bond B has a DV01 of $.05 per $100 face value.

a. If Daniela buys $1 million (face amount) of bond A, what should her position (face amount)

in bond B be in order to hedge out all interest rate risk on the portfolio?

b. If bond A and bond B are par bonds (that is, they have prices equal to their face values and have equal yields to maturity), what dollar amount needs to be spent on bonds A and B to immunize the bond portfolio to a horizon of seven years if $1 million is spent on the portfolio? (Assume that the DV01s were calculated with respect to a 1 basis point decline in each bond’s continuously compounded yield to maturity.)

AppendixLO1