Consider buying one 4-year bond and duration-hedging by, Finance Basics

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Consider buying one 4-year bond and duration-hedging by

Suppose the yield curve is flat at 6%. Consider a 4-year 5%-coupon bond and an 8-year 7%-coupon bond. All coupons are annual.

a. What are the prices and durations of both bonds?

b. Consider buying one 4-year bond and duration-hedging by selling an appropriate quantity of the 8-year bond. Any residual is financed with short-term (zero-duration) bonds. Suppose the yield curve can move up to 6.25% or down to 5.75% over the course of 1 day. What are the results from the hedge?

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