Questions #33-36 are based on the following information: Research has shown that the movements of the US Treasury yield curve over time can be described by changes in three main factors: its level, its slope, and its curvature. The diagrams below illustrate the effects of each of these three factors operating in isolation: Effects of level, slope, and curvature on yield curve A. Level B. Slope C. Curvature Interest rates (0) Interest rates (%) 7.0- 7.0- Interest rates (6) 7.0 6.8 6.8 6.6 6.4 Level 6.8 6.6 6.4- 6.2 6.0 5.8 5.6 5.4 6.4 6.2 6.0 5.8 5.6 5.4 Curvature Slope 6.0 5.8 5.6 0 1 2 3 4 5 6 7 8 9 10 0 1 2 3 4 5 6 7 8 9 10 0 1 2 3 4 5 6 7 8 9 10 Maturity in years Maturity in years Maturity in years In the next four problems we look at a bond strategy to profit from curvature changes: the butterfly trade. This trade involves three bonds of different maturities; here we use 2- and 10-year T-notes for the "wings" of the butterfly and the 5-year T-note for the "body." If we expect an increase in curvature, the 5-year YTM should move up relative to the 2- and 10-year YTMs. Given the information in the table below, construct an arbitrage or trading portfolio by 1) selling 1,000 of the 5-year notes and 2) buying quantities of the 2- and 10-year notes, such that 3) the net cost of the trading portfolio is zero, and 4) the DVOI of the trading portfolio is zero. All face amounts = $1,000, and remember that one basis point = 0.0001 = 1/100 of a percentage point. Bond Price #of Bonds Maturity YTM (% of face) Quantity Bought(+)/Sold(-) DVO1 2 years 4.50% 101 +Q $0.19 5 years5.50% 98 -1,000 $0.42 10 years 6.00% 93 +Q30 $0.70 DVO1 = S-che per basis point in value of one bond with face = $1,000 & price shown 13 pts 33. Questions #33-36 are based on the following information: Research has shown that the movements of the US Treasury yield curve over time can be described by changes in three main factors: its level, its slope, and its curvature. The diagrams below illustrate the effects of each of these three factors operating in isolation: Effects of level, slope, and curvature on yield curve A. Level B. Slope C. Curvature Interest rates (0) Interest rates (%) 7.0- 7.0- Interest rates (6) 7.0 6.8 6.8 6.6 6.4 Level 6.8 6.6 6.4- 6.2 6.0 5.8 5.6 5.4 6.4 6.2 6.0 5.8 5.6 5.4 Curvature Slope 6.0 5.8 5.6 0 1 2 3 4 5 6 7 8 9 10 0 1 2 3 4 5 6 7 8 9 10 0 1 2 3 4 5 6 7 8 9 10 Maturity in years Maturity in years Maturity in years In the next four problems we look at a bond strategy to profit from curvature changes: the butterfly trade. This trade involves three bonds of different maturities; here we use 2- and 10-year T-notes for the "wings" of the butterfly and the 5-year T-note for the "body." If we expect an increase in curvature, the 5-year YTM should move up relative to the 2- and 10-year YTMs. Given the information in the table below, construct an arbitrage or trading portfolio by 1) selling 1,000 of the 5-year notes and 2) buying quantities of the 2- and 10-year notes, such that 3) the net cost of the trading portfolio is zero, and 4) the DVOI of the trading portfolio is zero. All face amounts = $1,000, and remember that one basis point = 0.0001 = 1/100 of a percentage point. Bond Price #of Bonds Maturity YTM (% of face) Quantity Bought(+)/Sold(-) DVO1 2 years 4.50% 101 +Q $0.19 5 years5.50% 98 -1,000 $0.42 10 years 6.00% 93 +Q30 $0.70 DVO1 = S-che per basis point in value of one bond with face = $1,000 & price shown 13 pts 33