Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Assume the yield curve is flat shown as following table. A cash and $duration-neutral butterfly is to be constructed by selling one thousand 7-year coupon

image text in transcribedimage text in transcribed

Assume the yield curve is flat shown as following table. A cash and $duration-neutral butterfly is to be constructed by selling one thousand 7-year coupon paying bonds and purchasing and coupon paying bonds with maturities 3 and 15 years respectively. More information on the bonds to be used in the strategy is given below: YTM Maturity (Years) Coupon Rate (%pa) Price Modified Duration Quantity (%pa) 3 8.00% 6.00% 105.42 -2.65 q_5 7 10.00% 6.00% 122.59 -5.24 -1000.00 15 10.00% 6.00% 139.20 -8.86 q_1 (f) What is the modified duration of the 15-year bond? (g) What is the cash-neutral equation in the system of equations needed to find q_s and q_1? (h) What is the $Duration-neutral equation in the system of equations needed to find q_s and q_l? (i): It can be shown that the solution to the system of equations is: q_s = 679.32 and q_I= 366.23. What is the profit from this strategy if the yield curve shifts upwards by 1% at all maturities? Assume the yield curve is flat shown as following table. A cash and $duration-neutral butterfly is to be constructed by selling one thousand 7-year coupon paying bonds and purchasing and coupon paying bonds with maturities 3 and 15 years respectively. More information on the bonds to be used in the strategy is given below: YTM Maturity (Years) Coupon Rate (%pa) Price Modified Duration Quantity (%pa) 3 8.00% 6.00% 105.42 -2.65 q_5 7 10.00% 6.00% 122.59 -5.24 -1000.00 15 10.00% 6.00% 139.20 -8.86 q_1 (f) What is the modified duration of the 15-year bond? (g) What is the cash-neutral equation in the system of equations needed to find q_s and q_1? (h) What is the $Duration-neutral equation in the system of equations needed to find q_s and q_l? (i): It can be shown that the solution to the system of equations is: q_s = 679.32 and q_I= 366.23. What is the profit from this strategy if the yield curve shifts upwards by 1% at all maturities

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Finance Fundamentals For Nonprofits

Authors: Woods Bowman

1st Edition

1118004515, 9781118004517

More Books

Students also viewed these Finance questions