DURATION CONVEXITY MATCHING Protecting against a large interest rate swing You have a ability (obligation with a payment of $1,600,000 due in 3 years. Use Bonds 1, 3 and 4 below to immunite the portfolio completely les matching the duration AND the convexity of a bond portfolio with the duration of the liability show that the interest rate changes by 7% farge swing from 5% to 10% immediately after you buy the bonds your portfolio terminal value still remains almost unchanged whereas the terminal values for all individual Bonds depart much more significantly from it) 7 Show clearly what weights you obtain for Bond 1.3 and 4 Reminder the portfolio terminal value includes the value of the re-invested coupons (see class notes) and the price of the bonds at year 5. As in Exercise 1, before starting to compute portfolio weights, first verity that when the interest rate DOESN'T change the stays at 3%) you do end up with terminal values of exactly $1.500,000 for all Bonds. This will ensure that you have the correct percentage of face value bought 2 Only then can you start the duration convexity matching by computing the weights needed), and only then can you check whether the terminal value says roughly constant for your portfolio weighted average of Bond 1, Bond 3 and Bond 4) while it does not for the individual Bords Compute the terminal values of both Bond 2 and the Portfolio made up of Bonds 1.3 and 4) as a function of the interest rate (let go from 0 to 10%) using a datatable Plot your results graphically to show that even though Bond 2 performs reasonably well in the region near it is no match for the portfolio it rates swing wildly Yield to muurty 3 Present Value of Future Obligation Bond 100% Bondt 9.00% 20 1 000 Bond 2 970 d 1000 Bond 4 7.50% 1,000 3 Coupon re Remaining Mounty Face value 6 7 11 3 1,000 Year Cash Fow Cash Fow Cash Fow Cash Fow 1 90 07 75 2 30 00 75 3 00 07 BO 4 00 97 00 5 1000 1097 1080 1075 2 1 Bond Pike 3127478 $1,306312290 -3 DURATION CONVEXITY MATCHING Protecting against a large interest rate swing You have a ability (obligation with a payment of $1,600,000 due in 3 years. Use Bonds 1, 3 and 4 below to immunite the portfolio completely les matching the duration AND the convexity of a bond portfolio with the duration of the liability show that the interest rate changes by 7% farge swing from 5% to 10% immediately after you buy the bonds your portfolio terminal value still remains almost unchanged whereas the terminal values for all individual Bonds depart much more significantly from it) 7 Show clearly what weights you obtain for Bond 1.3 and 4 Reminder the portfolio terminal value includes the value of the re-invested coupons (see class notes) and the price of the bonds at year 5. As in Exercise 1, before starting to compute portfolio weights, first verity that when the interest rate DOESN'T change the stays at 3%) you do end up with terminal values of exactly $1.500,000 for all Bonds. This will ensure that you have the correct percentage of face value bought 2 Only then can you start the duration convexity matching by computing the weights needed), and only then can you check whether the terminal value says roughly constant for your portfolio weighted average of Bond 1, Bond 3 and Bond 4) while it does not for the individual Bords Compute the terminal values of both Bond 2 and the Portfolio made up of Bonds 1.3 and 4) as a function of the interest rate (let go from 0 to 10%) using a datatable Plot your results graphically to show that even though Bond 2 performs reasonably well in the region near it is no match for the portfolio it rates swing wildly Yield to muurty 3 Present Value of Future Obligation Bond 100% Bondt 9.00% 20 1 000 Bond 2 970 d 1000 Bond 4 7.50% 1,000 3 Coupon re Remaining Mounty Face value 6 7 11 3 1,000 Year Cash Fow Cash Fow Cash Fow Cash Fow 1 90 07 75 2 30 00 75 3 00 07 BO 4 00 97 00 5 1000 1097 1080 1075 2 1 Bond Pike 3127478 $1,306312290 -3
