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 Hey Duration

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FURA RATE
Itr 1 1 1 72 x
ref a HA

atra 1 I afa
 FV 1,000
Spot curve 1 0.25
yr
0.5
2yd
0.75
322
4 yr 1

5 1.25
yr

a From THE no Arbitrage condition WE KNOWTHAT

Ita 1 81 1 72 1 7

THEREFORE

1 4 1 1 1 52

cnet.FI a

1 fa
fifi

farots
 Next

1 9 Ita 1 72 1 73

14h3 1 V24 1 5

1 73 14h3
F 2

Atf
GÜIJÊ
ftp
1.25
REPEATING THE SAME STEPS FOR Ty AND TS
GES Us

ffa F
1

2.26J
fs

A
 b The price of
any Band is THE Present Vane

OF ITS FUTURE CASA FONS THUS USING THE SPOT

RATES CORRE TO DISCOUNT THE CASA FLOWS

i 0.5 corram 5
yr maturity

Pv
sina.fi FEEp

SI964
IS A

b 1.5 couro 5
yr MATURITY

a
c II
pastora da
 C REMEMBER THAT THE YIELD TO Maturity
IS THE CONSTANT RATE BY WHICH HE OULD HAVE

TO DISCOUNT THE CASH FLOWS IN ORDER TO PRICE

BY
THEM AT MARKET PRICES

i 964.11
FEIFFER

A
1.244J
ftp

ii
sina.fi FtFs

A
1.235
ftp
Do
 d THE YIELD TO MATURITY DEPENDS UPON BOTH

THE PATTERNS OF COUPON PAYMENTS AND SPOT RATES AT

THE time of THE COUPON PAYMENT

THE 1.5 BAND HAS A SLIGHTLY GREATER

PROPO TION
OF ITS TOTAL PAYMENTS COMING EARLIER
HEN

RATESINT REST
ARE LOW THUS ITS YIELD WILL BE SIGAM

comer
Do

C The 0.5 Bons IS SELLING AT DISCOUNT BECAUSE

THE SPO
ITS COUPONS ARE SMALL RELATIVE TO MOST OF
STREAM
INTEREST RATES THIS IMPLIES THAT THE COUPON
VALE
IS Not DELIVERING THE MARKET DETERMINED TIME

a
money
THEREFORE to INDUCE AN INVESTOR TO HOLD

THE BOND THE PURCHASE PRICE THAT AN INESTOR PAYS

FACE VANE THAT WILL BE

DELIVBONA'S
RED
MUST BE BEEN THE

AT THE END OF THE LIFETIME

De
 3 yr 1.5 coupon

0.745 0.76
YTH

WE KNOW THAT

Po
Apta
a
AP MD

TO GET THE CHANGE IN PRICE

Titus IN OVER

A PE MOST CALCULATE ITS MODIFIED DURATION HD AND

ariana price Do

PV 0.745
YR CASA FONS
15 151.00745 14.89
1

2 15 915 11.0074514 14.78

3 anos 511,015 1.0074523 992.65

Taus

14.89 1478 992.65

Po

fiIhos
 FINALLY

D t E
PÉ fod
t Ta
PUFF

IFE Iii Fieis

0.015 7 0.029 2.913

2.956

iias
ma
sim
MA at2

HENCE

AP 2.93 0.000157 5 4022.32

o.ES
APe
 P Po 0.45

D P 0.45 1,022.32

81021 se
DIP
D

6 6 coupon 12
yr you
6 10 coupon 8
yr ytor
Find To

THE KEY HERE IS TO FIND A COMBINATION OF THES

TWO BONDS THAT HAS A ASHTON ONLY AT E 6 THEN

KNOWING THE PRICE OF THE PORTFOLIO AND THE CASA FON
At t G he CAN CALCULATE V6
NOTE THAT

BONA 1 60 60 60 60,60 1060

Bens 2 A 100 100 100 100,100 1100

 The required Portfolio MUST BE SOH THAT

60 2 100 a 22 O

0.6
f
Titus For era unit of Band 1 neust

HAVE 0.6 UNITS OF BOND 2

The cost of THIS Portfolio WOULD BE

Pp 1 x Pa 0.6 Pz

WHERE

i
EEEE
753.12

81,092
 HENCE

753.32 0.6 1,09246

Pp
64
ftp
BUT NOTE THAT THE CASA RON FOR THIS

PORTFOLIO IS O FOR YEARS 1 to 5 THOS

B
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