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Unformatted text preview: ACTSC445/845 ASSIGNMENT 2. DUE ON OCT, 27TH IN CLASS You are free to choose the method you want. A tool like excel certainly helps. (1) You want to construct a portfolio formed of 3-year, 6-year, and 9-year zero-coupon bonds. All bonds have a face value of $100. The initial amount of money to be invested is 1 , 000. Assume the continuously compounded spot rates for 3, 6, and 9 years are 0 . 03, 0 . 04, and 0 . 05, respectively. (a) (5 points) Determine how many units of each zero-coupon bonds you need to buy if you want the Fisher-Weil duration and convexity to be 4 and 20, respectively. (b) (5 points) Assume all spot rates instantaneously increase by 10bp. Use the Fisher-Weil duration and convexity set in part (1a) to approximate the change of value (in dollars) of the portfolio determined in (1a). Compare your answer with the true change of value. (c) (5 points) View the portfolio determined in part (1a) as a single fixed income security with cash flows at 3, 6, and 9. Determine its annual effective yieldsecurity with cash flows at 3, 6, and 9....
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This note was uploaded on 10/30/2009 for the course ACTSC 331 taught by Professor David during the Spring '09 term at Waterloo.
- Spring '09