It is April 13, 2017.

Consider the following Treasury yield curve:

Maturity YTM Price

2-year 3/31/19 2.00% 100-00

5-year 3/15/22 3.50% 100-00

10-year 2/28/27 4.75% 100-00

There are 2 portfolios, each with $100MM market value.

Portfolio I:5-year bullet.

Portfolio II: 2-year/10-year barbell.

1.) Today, you invest the $100MM in each portfolio, so that the portfolios

have the same duration.The trades settle tomorrow.

How much is invested in the 2-year and in the 10-year?

Suppose on October 14, 2017 the 2-year ytm increases 50bp and

the 10-year ytm increases 25 bp.

2.) What are the price and yield for the 5-year that produce the same realized total rate of return

for the bullet and the barbell for this 6-month investment period?

3.) Discuss the issues/complexities involved with solving these questions.