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The continuously compounded yield curve is given as follows: 0.5 year to maturity, yield = 5% 1 year to maturity, yield = 5.5% 1.5 year
The continuously compounded yield curve is given as follows:
0.5 year to maturity, yield = 5%
1 year to maturity, yield = 5.5%
1.5 year to maturity, yield = 6%
2 year to maturity, yield = 6.5%
Calculate the duration andconvexity of the following securities:
- A 2 year coupon bond paying4% semi-annually
- A 1 year floating rate bond with a 50 basis point spread, with coupons paid semi-annually. Compute its duration and convexity immediately after issuance (i.e. the first coupon is fixed)
- Construct a duration hedge forthe 2 year coupon bondusing 6 month zero coupon bond
- Construct a durationand convexity hedge for the 2 yearcoupon bond using 6 month and 1 year zero coupon bond
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