Assume you manage the following portfolio of liabilities. Instrument Coupon Maturity date 15-03-02 15-03-11 Face Value ($m) 100 Market Value ($) 100,077,029.60 100,607,102.57 Market Macaulay Interest rate Duration 5.08/5.12 ? 5.53/5.57 7.77 DB02 5.20% 5.65% DB11 100 Note: Today is the 15th March 2001 and there are 92 days between today and 15th June 2001. The DB02 market value is based on 5.12% yield and DB11 market value is based on 5.57% yield. (a) Assume that the $100m of DB02 in the table above was issued today to an institutional investor called BondBuy Ltd. If BondBuy holds the DB02 until maturity, what percentage return will BondBuy have earned on its investment for the one year holding period? [1 mark] (b) Calculate DV01 for the DBO2 bond. [2 marks] (c) Today (15th March 2001) you receive a highly regarded economic forecast of interest rates in three months. The rate forecast for DB02 is 4.88/4.92 and the rate forecast for DB11 is 5.48/5.52. (0) Use the duration to estimate the expected change in the dollar value of the DB02 and DB11 liabilities that you manage. [2 marks] (ii) Calculate the cost of funds for DB02 over the period 16th March 2001 to 15th June 2001 (assume DB02 yield in June is equal to the forecast of 4.88/4.92). [2 marks] Assume you manage the following portfolio of liabilities. Instrument Coupon Maturity date 15-03-02 15-03-11 Face Value ($m) 100 Market Value ($) 100,077,029.60 100,607,102.57 Market Macaulay Interest rate Duration 5.08/5.12 ? 5.53/5.57 7.77 DB02 5.20% 5.65% DB11 100 Note: Today is the 15th March 2001 and there are 92 days between today and 15th June 2001. The DB02 market value is based on 5.12% yield and DB11 market value is based on 5.57% yield. (a) Assume that the $100m of DB02 in the table above was issued today to an institutional investor called BondBuy Ltd. If BondBuy holds the DB02 until maturity, what percentage return will BondBuy have earned on its investment for the one year holding period? [1 mark] (b) Calculate DV01 for the DBO2 bond. [2 marks] (c) Today (15th March 2001) you receive a highly regarded economic forecast of interest rates in three months. The rate forecast for DB02 is 4.88/4.92 and the rate forecast for DB11 is 5.48/5.52. (0) Use the duration to estimate the expected change in the dollar value of the DB02 and DB11 liabilities that you manage. [2 marks] (ii) Calculate the cost of funds for DB02 over the period 16th March 2001 to 15th June 2001 (assume DB02 yield in June is equal to the forecast of 4.88/4.92). [2 marks]