The yield curve for A-rated bonds is presently flat at a promised YTM of 10%.

You own an A-rated, five-year, 10% coupon bond with annual coupon payments.

You expect rates to decrease over the next year and would like to take advantage of your expectation with a rate-anticipation swap. The bond you are considering substituting is an A-rated, 10-year, 10% coupon with annual coupon payments.

a. In the table below, evaluate your rate anticipation swap by comparing your current bond with the substitute candidate given the following scenario: The yield curve will shift down one year from now from 10% to 9%. Assume the coupon date is one year from now.

b. In the table below, evaluate your rate anticipation swap given the following scenario: The yield curve will shift up one year from now from 10% to 11%.
Assume the coupon date is one year from now.

c. Comment on your rate-anticipation swap.

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Current value Current Macaulay duration Coupons Interest on interest Bond price one year later Dollar return one year later One-year TR Current Bond: 5 Yr, 10% Coupon Bond Substitute Bond: 10 Yr, 10% Coupon Bond