Problem: Assume that you wish to take a bet on the yield spread between two bonds: a 10-year corporate bond rated BB and a 10-year Treasury bond.

Information about both bonds follows:

	10 year Treasury bond	10 year BB corporate bond
Maturity	10 years	10 years
Coupon rate	5%	7%
YTM	5.5%	7.5%
Current price	$96.193	$96.526
DV01	$0.0744	$0.0680

Assume that you believe the economy is going to get much worse in the future, and you wish to make your bet based on this premise. Also assume that you will buy 1000 units of the bond that you are going to hold "long." Finally, ignore margin requirements, interest on cash proceeds, and any intervening coupon payments of the long and short bonds.

Question:

(1) Are you betting that rates are going to converge or diverge? Why? Which bond will you buy and which bond will you short-sell?

(2) What is the DV01 ratio? Round to exactly 4 decimal places.

(3)Using the DV01 ratio, calculate the number of units of the bond you will short-sell.