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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 14.
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 zerocoupon yield curve, answer questions 57.
Years To Maturity
ZeroCoupon 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 1year bond 2 years from now?
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View Full Document 6) Suppose you wish to bet that 5 years from now the differnce between the yield to
maturity on 5year and 25year 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 5year bonds
will have increased relative to their implied forward yield?
How would you bet that 5 years from now the yield to maturity on 25year 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.
 Fall '08
 CHABOT
 Economics

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