Solution 4

Solution 4 - Fin 448: Fixed-Income Securities Homework...

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Fin 448: Fixed-Income Securities Homework Solution 4 Wei Yang 1 Spread trade using repos (1.1) Both are par bonds. Per $1 million face value, we have P tr = 1 M , DV 01 tr = 449 . 129 P co = 1 M , DV 01 co = 437 . 603 (1.2) To match DV 01 for a $1M face value short position in Treasury bonds, we need to long corporate bonds of a face value of h = DV 01 tr DV 01 co = 1 . 02634 M Since they are par bonds, the face values are also the prices. (1.3) We enter into a reverse repo to create the short position in Treasury bonds with a value of P tr . At termination, we receive the interest at the 4% repo rate P tr × 4% 2 = 20000 We enter into a repo to create the long position in corporate bonds with a value of hP co . At termination, we pay back the interest at the 5% repo rate hP co × 5% 2 = 25658 . 5 Note that the loans and the interests are based on the market values of the bonds. (1.4) Treasury and corporate bonds will pay coupons of $0.02 and $0.025, re- spectively, per $1 face value. For the short Treasury bonds position established with reverse repo, the $1 mil-
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Solution 4 - Fin 448: Fixed-Income Securities Homework...

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