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Chapter 7 Key Rate Hedging The following questions will lead to the design of a spreadsheet to calculate the two- and five-year key rate duration
Chapter 7 Key Rate Hedging The following questions will lead to the design of a spreadsheet to calculate the two- and five-year key rate duration profile of four-year bonds. 7.1 Column A should contain the coupon payment dates from 5 to 5 years in increments of 5 years. Let column B hold a par-yield curve flat at 4.50%. Put the discount factors corresponding to the par-yield curve in column C. Price a 12% and a 6.50% four-year bond under this initial par-yield curve. 7.2 Create a new par-yield curve, by adding a two-year key rate shift in column D. Compute the new discount factors in column E. What are the new bond prices? 7.3 Create a new par-yield curve, by adding a five-year key rate shift in column F. Compute the new discount factors in column G. What are the new bond prices? 7.4 Assume that the par-yield curve is flat at 3%. Consider the hedging of a 30-year maturity bond with 4% coupon rate using payer's swaps of 2-, 5-, 10- and 30-yr maturities. Let the notional of the coupon bond be $10m. a. Compute the kr01s of the coupon bond. b. Compute the kr01s of the four swaps. b. Provide the notional values of the four swaps for hedging. Chapter 7 Key Rate Hedging The following questions will lead to the design of a spreadsheet to calculate the two- and five-year key rate duration profile of four-year bonds. 7.1 Column A should contain the coupon payment dates from 5 to 5 years in increments of 5 years. Let column B hold a par-yield curve flat at 4.50%. Put the discount factors corresponding to the par-yield curve in column C. Price a 12% and a 6.50% four-year bond under this initial par-yield curve. 7.2 Create a new par-yield curve, by adding a two-year key rate shift in column D. Compute the new discount factors in column E. What are the new bond prices? 7.3 Create a new par-yield curve, by adding a five-year key rate shift in column F. Compute the new discount factors in column G. What are the new bond prices? 7.4 Assume that the par-yield curve is flat at 3%. Consider the hedging of a 30-year maturity bond with 4% coupon rate using payer's swaps of 2-, 5-, 10- and 30-yr maturities. Let the notional of the coupon bond be $10m. a. Compute the kr01s of the coupon bond. b. Compute the kr01s of the four swaps. b. Provide the notional values of the four swaps for hedging
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