7 Interest Rate Risk

# X party receiving fixed cf 1 at time t 0 parties x and

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Unformatted text preview: Forward Loan. Show exactly how you need to proceed now and in certain future periods in order to accomplish your objective. Be specific as to how many zero- coupon securities you would need to buy and/or issue at LIBOR rates, quantify your relevant cash flows, and determine your actual borrowing rate. C) Another way to lock in this borrowing rate is by entering into a Forward Rate Agreement (FRA) with a willing counterparty. If you do enter such an FRA, what will your gain or loss be if it turns out that 1- year borrowing rates for 2012 are 3.2% instead of 2.922%. (Remember that FRAs are settled at the beginning of the loan period.) Problem 6 A pension fund holds a portfolio of money market securities that the manager believes are paying excellent yields compared to other comparable- risk short- term securities. However, the manager believes that interest rates are about to fall. What type of swap will allow the fund to continue to hold its portfolio of short- term securities while at the same time benefiting from a decline in rates? Ec 174 INTEREST RATE RISK p. 17 of 17 ANSWERS Table A Problem 1 Year ft A) [See table at right] 2009 0.0062 0.0104–0.015 – 1] B) πL = - \$3,442.08 = [750,000(e 2010 0.0104 Problem 2 2011 0.0128 A) B0 = \$1,035.10 B) D = 3.5662; D* ≈ 3.4624 2012 0.0422 C) Using modified duration, price rises by ≈ 0.8656% to \$1,044.06. Using EXCEL formulas, exact price = \$1,044.11. Problem 3 A) B0 ≈ \$1,084.62 Flat P = \$1,072.81, plus (114/181)×\$37.50/2 = \$11.81 accrued interest B) I = \$37.50/yr C) Return = YTM = 2.8825 %/yr Problem 4 Go short with N* = 60 September T- bond futures. Close the position in July. Problem 5 A) [See table at right] Table B B) Buy 3500 \$1,000- par zeros maturing at end of 2011; pay about T (Yr) ry(T) ft \$3,279,000. Issue 3500 × e0.02922 = 3,604 zeros maturing at end of 1 (2009) 1.890% 1.890% 2012; get ≈ \$3,279,000. At the end of 2011 you collect the \$3.5 2 (2010) 1.981% 2.072% million you needed to borrow. At end of 2012 you pay off \$3,604,000 on your bond obligation. Your borrowing rate was 3 (2011) 2.170% 2.548% 2.928% ≈ 2.922%: 3,604,000 = 3,500,000 e0.02928(1). 4 (2012) 2.358% 2.922% C) πB = \$9,716 5 (2013) 2.545% 3.293% Problem 6 [See BKM, Ch. 23, Concept Check 7]...
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## This document was uploaded on 02/18/2014 for the course ECON 174 at UCSD.

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