A company has a long position in a two-year bond and a three-year bond as well as a short position in a five-year bond. Each bond has a principal of $100 million and pays a 5% coupon annually. Calculate the company’s exposure to the one-year, two-year, three-year, four-year, and five-year rates. Use the data in Tables 8.7 and 8.8 to calculate a 20-day 95% VaR on the assumption that rate changes are explained by

(a) one factor,

(b) two factors, and

(c) three factors. Assume that the zero-coupon yield curve is flat at 5%.

AppendixLO1