You hold a bond portfolio that consists of (i) a 4-year bond with a face value of $100 that pays an annual coupon of 10%, and (ii) a 2-year bond with a face value of $100 that pays an annual coupon of 20%. The yield curve is flat at r = 5%. You are worried about fluctuations in the price of your portfolio. Explain how you can hedge your risk using 3-year zero-coupon bonds with a face value of £100.
You hold a bond portfolio that consists of (i) a 4-year bond with a face value of $100 that pays an annual coupon of 10%, and (ii) a 2-year bond with a face value of $100 that pays an annual coupon of 20%. The yield curve is flat at r = 5%. You are worried about fluctuations in the price of your portfolio. Explain how you can hedge your risk using 3-year zero-coupon bonds with a face value of £100.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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![You hold a bond portfolio that consists of (i) a 4-year bond with a face value
of $100 that pays an annual coupon of 10%, and (ii) a 2-year bond with a face
value of $100 that pays an annual coupon of 20%. The yield curve is flat at
r = 5%. You are worried about fluctuations in the price of your portfolio.
Explain how you can hedge your risk using 3-year zero-coupon bonds with a
face value of £100.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F5fb5b4df-ad1d-4eb5-a5a3-fc578ce1ecb3%2F3944a849-708f-4635-b9ab-f67656ada857%2Fdazidrs_processed.png&w=3840&q=75)
Transcribed Image Text:You hold a bond portfolio that consists of (i) a 4-year bond with a face value
of $100 that pays an annual coupon of 10%, and (ii) a 2-year bond with a face
value of $100 that pays an annual coupon of 20%. The yield curve is flat at
r = 5%. You are worried about fluctuations in the price of your portfolio.
Explain how you can hedge your risk using 3-year zero-coupon bonds with a
face value of £100.
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