Assume that you believe that the yield curve is going to steepen in the near future. You are going to devise a trading strategy using the 5-year Treasury coupon bond with par value of $100 and the 10-year Treasury coupon bond with par value of $100 that will take advantage of this relative value trade.

You do not want to take on any other risks, besides the risk that you might be wrong about the yield curve steepening.

Assume that the 5 year bond has a coupon of 4% and a yield to maturity of 3%.

Assume that the 10 year bond has a coupon of 4.5% and a yield to maturity of 3.5%.

1. Which bond will you buy and which bond will you short sell?

2. Assume that you will use 10,000 units of the 5-year bond. How many units of the 10- year bond will you need to use in your trade? Round DV01 and bond price calculations to 4 digits.

3. State the balance sheet when you set up your trade. Assume that you use cash to fund the long position and that the cash you receive from the short position is listed separately on your balance sheet. Round bond price calculations to 4 digits.