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Suppose that we would like to buy one of the three bonds for a holding period of 1 year. We anticipate the term structure to

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Suppose that we would like to buy one of the three bonds for a holding period of 1 year. We anticipate the term structure to rise to a flat 5% by the end of the year. Briefly discuss which bond we should buy and why.

(ii)

Construct a simple butterfly strategy using bonds A, B and C. Briefly discuss the objectives of this strategy.

(iii)

Without any further calculations, briefly discuss how a 50-50 weighted butterfly and a regression-weighted butterfly would differ from the simple butterfly in (ii).

(iv)

Suppose that a US T-bond futures contract has just been issued, and bonds A, B and C are eligible for delivery. Compute the conversion factor for each bond.

(v)

Without any further calculations, briefly discuss how we would compute the Cheapest-To-Deliver bond with respect to the futures contract in (iv).

Consider the following three US Treasury bonds Maturity Coupon Price Modified Dollar Duration -0.95 ($) -2.72 ($) -5.78 ($) 1 Bond A Bond B Bond C 3 7 3% 3% 3% 99.04 97.22 94.00 The term structure is currently flat at 4% per annum. All bonds pay their coupons annually and they are denominated at $100 face value per contract. Consider the following three US Treasury bonds Maturity Coupon Price Modified Dollar Duration -0.95 ($) -2.72 ($) -5.78 ($) 1 Bond A Bond B Bond C 3 7 3% 3% 3% 99.04 97.22 94.00 The term structure is currently flat at 4% per annum. All bonds pay their coupons annually and they are denominated at $100 face value per contract

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