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W08 Final 3351.doc

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QuestioCreditMarkn115215315415515625Total100Question 1 15 pointsA 5 US Treasury bond will mature June 30 2020 Today is April 30 2008 For simplicity assume that the bond trading is also settled on the same day If the yieldtomaturity of the bond is 350 how should the bond price be quoted Question 2 15 pointsA 5 million floater pays floating interest rate at 6month LIBOR50 basis points reset semiannually The sixmonth LIBOR was 400 at the last reset on January 15 2007 Today is April 30 and the current 6month LIBOR is 350 What is the market value of the floater today This LIBOR is quoted as bond equivalent yield ie APR with semiannual compounding 1 percent is 100 basis pointsQuestion 3 15 pointsAssume all the coupon bonds have just paid out their respective semiannual interest payments today Assume further that all the bonds have a par value of 100 and are perfectly divisible ie buying or selling any fraction of a bond unit is possible You have a fixed liability of 1000000 at the end of the fifth year Assume that you can only invest in two bonds Bond 1 carries 10 coupon with 10 years to maturity and Bond 2 carries 13 coupon with 5 years to maturity a10 points The term structure is flat and the yield expressed as bondequivalent yield is 8 percent Construct an immunization portfolio today b5 points Assume the term structure shifts to 9 flat in six months check if you are able to meet your obligation then rebalance your portfolio Extra writing space on next page
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