Global Capital Market-HMW2 - Global Capital Market Homework...

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Global Capital Market Homework 2 Question 1 1. Maybe people have certain long-tern obligation and want to use the long-term bond to hedge the risk of interest rate move. 2. Because the traded price is at par, the duration is exactly 50 years. ( ) ( ) Where ( ⁄ ) ( ) ( ⁄ ) ( ⁄ ) ( ) ( ⁄ ) Where the DV01 means one percentage point change of yield, how much the value of bond will change. 3. The method of calculation is the same as (2), our result is as follows: Assuming the initial par value is $100, because the coupon rate remains annually 4.15% , when the yield increased to annually 6%, the PV of the bond becomes to $70.77, which we assume as the new theoretical price. If the market is efficient enough, the price will decrease from 100 to 70.77, so the loss of price might be around $29.23; ( ) ; ( )
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Question 2 The formula to calculate the forward rate from the spot rate is as follows: [ ( ⁄ ) ( ⁄ ) ] ( ) Where means the forward rate that starts in k years and lasts for 6 month, means the spot rate of k+0.5 years, denotes the spot rate of k years.
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