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Unformatted text preview: ActSc 445/845 Assignment Two Due Date: Thursday, October 28, 2010. 1. You want to construct a portfolio formed of 2-year, 5-year and 8-year zero-coupon bonds. All bonds have a face value of $100. The initial amount of money to be invested is $1 , 000. Assume that the continu- ously compounded spot rates for 2, 5, and 8 years are 0.02, 0.04, and 0.06 respectively. (a) Determine how many units of each zero-coupond bond you need to buy if you want the Fisher-Weil duration and convexity to be 5 and 30, respectively. (b) Assume all spot rates instantaneously increase by 10bp. Use the Fisher-Weil duration and convexity set in part (a) to approximate the change of value (in dollars) of the portfolio determined in part (a). Compare you approximation to the true change in value. (c) View the portfolio determined in part (a) as a single fixed income security with cash flows at 2, 5, and 8. Determine its annual effective yield and compute its modified duration and convexity....
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This note was uploaded on 12/12/2010 for the course ACTSC 445 taught by Professor Christianelemieux during the Fall '09 term at Waterloo.
- Fall '09