Assume the yield curve is flat at 10% and there are only three bonds in the market. Further assume the three bonds have amount outstanding as indicated. The properties of the bonds follow: Bond A B C Duration (Years) 5 10 12 Amount Outstanding (Millions $) 25 50 25 Set up a single index representation of their covariance. What is the covariance between all pairs of bonds.

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Assume the yield curve is flat at 10% and there are only three bonds in the market.
Further assume the three bonds have amount outstanding as indicated. The properties of the
bonds follow:
Bond
Duration (Years)
Amount Outstanding (Millions $)
A
25
В
10
50
12
25
Set up a single index representation of their covariance. What is the covariance between all
pairs of bonds.
Transcribed Image Text:Assume the yield curve is flat at 10% and there are only three bonds in the market. Further assume the three bonds have amount outstanding as indicated. The properties of the bonds follow: Bond Duration (Years) Amount Outstanding (Millions $) A 25 В 10 50 12 25 Set up a single index representation of their covariance. What is the covariance between all pairs of bonds.
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