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A $100 million bond portfolio has a modified duration of 8. The portfolio manager wants to decreases the duration to 6 by using a swap.
A $100 million bond portfolio has a modified duration of 8. The portfolio manager wants to decreases the duration to 6 by using a swap. Consider the possibility of using three-year swap with semi-annual payments. (a) Determine the durations of a pay-fixed (receive-floating) interest rate swap. Assume that the duration of a fixed-rate bond is 75% of its maturity. (b) Determine the notional principal of the swap necessary to change the duration as desired.
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