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EXAM I Practice Prob - Econ 435 Financial Economics Fall 2001 Practice Problems Midterm I A useful equation you will be provided on the exam change

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Econ 435 Financial Economics Fall 2001 Practice Problems Midterm I A useful equation you will be provided on the exam % change in a bond’s price for a given dy = -MD*(dy) + VEX*( dy 2 ) for small changes in y. Your bond portfolio consists of $1 million in bond A and $3 million in bond B. Bond A has a Modified Duration (MD) of 8 and Convexity (VEX) of 60. Bond B has a Modified Duration (MD) of 10 and Convexity (VEX) of 80. Use this information to answer 1-4. 1) What is the Modified Duration of your portfolio? 2) What is the Convexity of your portfolio? 3) If the yield to maturity on your portfolio increases by 10 basis points what will happen to the value of your portfolio? 4) There are 2 government bonds. Government bond X has a Modified Duration (MD) of 5 and a Convexity of 40. Government bond Y has a Modified Duration (MD) of 6 and a Convexity of 50. If you were to short these 2 government bonds, what combination of government bonds would best hedge your bond portfolio against interest rate changes? Given the following zero-coupon yield curve, answer questions 5-7. Years To Maturity Zero-Coupon Yield To Maturity 1 4% 2 4.5% 3 5% 5 5.5% 10 6% 15 7% 20 8% 25 9% 30 10% 5) What is the implied forward yield on a 1-year bond 2 years from now?
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6) Suppose you wish to bet that 5 years from now the differnce between the yield to maturity on 5-year and 25-year bonds will be smaller than the difference in their implied forward yields (yield curve will flatten or invert). How would you bet that 5 years from now the yield to maturity on 5-year bonds will have increased relative to their implied forward yield? How would you bet that 5 years from now the yield to maturity on 25-year bonds
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This test prep was uploaded on 04/09/2008 for the course ECON 435 taught by Professor Chabot during the Fall '08 term at University of Michigan.

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EXAM I Practice Prob - Econ 435 Financial Economics Fall 2001 Practice Problems Midterm I A useful equation you will be provided on the exam change

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