2. A portfolio manager has a $50 million position in IBM 8-year bonds priced at $101-03 with a modified duration of 6.7. To hedge this position the manager wishes to create a short position in a Treasury note with 7 years to maturity priced at $98-28 with a modified duration of 6.4. Both bonds are priced at the beginning of an accrual period, i.e., no accrued interest. a) What is the DV01 per $1 million for the IBM bond? b) What is the DV01 per $1 million for the Treasury note? c) What is the face amount of Treasuries the manager will sell to make the portfolio duration neutral? 2 3 3 2 3 3. A $10 million 30-year 3% coupon FNMA MBS pool is priced at a 2.7% yield for settlement on May 12. a) What is the accrued interest b) What is the price of the pool, account for the delay (24 days), if the present value of the cash flows, discounted at 2.7% yield, is $10,161,343.18? 4. Consider two CMO structures using the same $1 billion balance of MBS pools: Structure 1: $732 million PAC class, $268 million companion class Structure 2: $702 million PAC class, $297 million companion class a) Which structure offers the most prepayment protection to the PAC class? b) The option cost for the PAC class of which structure will be higher? 1 1