Assume that you own 10,000 semi-annual pay $100 par value bonds with a coupon rate of 7%, a YTM of 5%, and a maturity of 10 years. Assume that you are concerned about rates rising in the future and you want to protect (hedge) the value of your portfolio from this situation. For your hedging bond, you choose a semi-annual pay 10-year maturity, 10% coupon bond with the same credit quality as your long position.

a. Calculate the DV01 of each bond, rounding to 4 digits, e.g. $0.1426. Show your work for partial credit.

7% bond DV01:

10% bond DV01:

b. What is the hedge ratio?