3/26

1 mo 0.01

6 mo 0.04

1 yr 0.13

2 yr 0.3

3 yr 0.36

5 yr 0.51

3/27

1 mo 0.01

6 mo 0.02

1 yr 0.11

2 yr 0.25

3 yr 0.3

5 yr 0.41

1. It is March 26 and you hold a $1mm (market value) long position in the 1-yr zero-coupon bond. Using modied durations, determine how much of the 5-yr zero-coupon bond you need to short so that your portfolio remains approximately unchanged if the 1-yr and 5-yr zero rates move in parallel.

2. What would the change in your portfolio value be if both the 1-yr rate and the 5-yr rate go up by 2 basis points?

3. What would the change in your portfolio value be if both the 1-yr rate and the 5-yr rate go down by 2 basis points?

4. What would the change in your portfolio value be if the 1-yr rate goes down by 2 basis points but the 5-yr rate stays the same?

5. What actually happens the following day? Calculate the value of your portfolio. Why did your portfolio value change from before?