Face Value 100 YTM

Coupon 6% BEY
Maturity Spot rates Cash Flows PV
0.5 1.50%
1 1.80%
1.5 2.00%
2 2.25%
2.5 2.40%
3 2.50%
3.5 2.80%
4 3.00%
4.5 3.20%
5 3.50%

New Section 1 Page 1

New Section 2 Page 2
 Face Value 100 YTM 1.697%
Coupon 6% BEY 3.39% Maturity X
Maturity Spot rates Cash Flow PV YTM Weight
0.5 1.50% 3.00 2.977667 3.39%
1 1.80% 3.00 2.94672 3.39%
1.5 2.00% 3.00 2.91177 3.39%
2 2.25% 3.00 2.868713 3.39%
2.5 2.40% 3.00 2.826303 3.39%
3 2.50% 3.00 2.784525 3.39%
3.5 2.80% 3.00 2.721796 3.39%
4 3.00% 3.00 2.663133 3.39%
4.5 3.20% 3.00 2.600626 3.39%
5 3.50% 103.00 86.59505 3.39%
111.8963

New Section 3 Page 3

New Section 4 Page 4
 Face Value 100 YTM 1.697%
Coupon 6% BEY 3.39% Maturity
Maturity Spot rates Cash Flow PV YTM Weight Weight
0.5 1.50% 3.00 2.977667 3.39% 0.026611
1 1.80% 3.00 2.94672 3.39% 0.026334
1.5 2.00% 3.00 2.91177 3.39% 0.026022
2 2.25% 3.00 2.868713 3.39% 0.025637
2.5 2.40% 3.00 2.826303 3.39% 0.025258
3 2.50% 3.00 2.784525 3.39% 0.024885
3.5 2.80% 3.00 2.721796 3.39% 0.024324
4 3.00% 3.00 2.663133 3.39% 0.0238
4.5 3.20% 3.00 2.600626 3.39% 0.023241
5 3.50% 103.00 86.59505 3.39% 0.773887
111.8963

New Section 5 Page 5

New Section 6 Page 6
Ted Oster wants to calculate the DV01 of a new position in a bond with a face
value of $1,000,000. The bond was bought today for $84.102 for $100 face value.
Oster knows that the Macaulay duration is 5.25. What is the DV01 of the position
if the bond has a yield to maturity of 10% per annum?

Suppose the yield on a zero-coupon bond declines from 7.00% to 6.95%

and the price of the zero increases from $202.45 to $203.87. What is
the value of DV01?

New Section 7 Page 7

New Section 8 Page 8
New Section 9 Page 9
A bank has a position of USD 12 million with an effective duration of 5
and a convexity of 9. The bank wishes to hedge its position with two
bonds where the first bond has an effective duration of 6 and a
convexity of 9. The second bond has a duration of 4 and a convexity of
7. How will the bank hedge against its position?

A bank has a position of USD 2 million with a duration of 10 years. To

completely hedge its position, the bank takes a short position of USD 1.4
million in bond B. What is the duration of bond B?

New Section 10 Page 10

 Alvin Johnson is a trader and plans to short $230 million of the (nominal) 4 6 ⁄7 s of 17
th February 2020 and purchase some amount of the TIPS 2 5 ⁄7 s of 17 th January 2020
against that. Compute the TIPS face amount that should be purchased for the trade to
be hedged against the interest rate levels.

New Section 11 Page 11

New Section 12 Page 12
Peter Drury, a risk manager at Capital Bank, is evaluating the price sensitivity
of an investment-grade callable bond using the bank's valuation system. The
table below gives a breakdown of the bond and the embedded option. The
current interest rate environment is flat at 5%.

New Section 13 Page 13

New Section 14 Page 14
New Section 15 Page 15