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Consider two ZC bonds. A 5-year with CC yield of 6% and a 30-year with yield of 7%. (a) Compute the price, duration, and PV01.
Consider two ZC bonds. A 5-year with CC yield of 6% and a 30-year with yield of 7%. (a) Compute the price, duration, and PV01. (b) What happens to their prices for a +/- 10 bp shift in yield (for both)? (c) Are the price changes and returns consistent with their PV01 and duration? (d) Repeat this for a +/- 100 bp shift in yield (e) Going back to the initial yields, What happens to their prices for a 1/4 year shift forward in time (yields unchanged)? What are their returns? How does that compare to their yields? Assuming you are long 1 of the 30-year bond (f) How many of the 5-year bonds should you buy/sell to be hedged? Based on this hedge ratio, will you have to borrow or deposit money? (g) Using that hedge ratio, from (f), compute the (combined) net price change from -100 bp to +100 bp in increments of 10 bp. Chart the results. What do you think? (h) Repeat part (g) but also assume that 1/4 of a year has transpired and use a 5% CC rate for any borrowed/deposited cash. Add this to the chart and comment value is 100$
Consider two ZC bonds. A 5-year with CC yield of 6% and a 30-year with yield of 7%.
(a) Compute the price, duration, and PV01.
(b) What happens to their prices for a +/- 10 bp shift in yield (for both)?
(c) Are the price changes and returns consistent with their PV01 and duration?
(d) Repeat this for a +/- 100 bp shift in yield
(e) Going back to the initial yields, What happens to their prices for a 1/4 year shift forward in time (yields unchanged)? What are their returns? How does that compare to their yields?
Assuming you are long 1 of the 30-year bond
(f) How many of the 5-year bonds should you buy/sell to be hedged? Based on this hedge ratio, will you have to borrow or deposit money?
(g) Using that hedge ratio, from (f), compute the (combined) net price change from -100 bp to +100 bp in increments of 10 bp. Chart the results. What do you think?
(h) Repeat part (g) but also assume that 1/4 of a year has transpired and use a 5% CC rate for any borrowed/deposited cash. Add this to the chart and comment
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