Solution 6

Solution 6 - Fin 448: Fixed-Income Securities Homework...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Fin 448: Fixed-Income Securities Homework Solution 6 Wei Yang 1 Interest rate swap (1.1) Since it is immediately after an exchange, the FRN will trade at par. The value of the floating rate side is thus $100M. (1.2) The fixed rate side is a 3.5-year bond paying semi-annual coupons at a coupon rate c =4.5%, while the yield curve is flat at y = 4.2%. P = Z c y " 1- 1 ( 1 + y 2 ) 2 n # + Z 1 ( 1 + y 2 ) 2 n The price is $100.967M. (1.3) As a buyer you have a long position in FRN and a short position in the fixed rate bond, so you have realized a loss of $0.967M. 2 Hedging bond position with swaps (2.1) A long position in swaps implies that you have bought an FRN and sold a fixed rate bond. To hedge a long position in bonds, you need to long a swap. The swap rate is just 5%, the same as the par yield of the Libor quality bonds. (2.2) The DV 01 of a $1M face value par bond is $779.458. For the FRN, which is priced at par P = 10 6 DV 01 = 1 2 1 + l 2 × P × 1 10 4 = 49 . 0196 (2.3) Our swap position implies buying floating and paying fixed, and thus a...
View Full Document

This note was uploaded on 10/06/2011 for the course FIN 448 taught by Professor Weiyang during the Spring '10 term at Rochester.

Page1 / 2

Solution 6 - Fin 448: Fixed-Income Securities Homework...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online