Consider the following Treasury yield curve:
|
Maturity |
YTM |
Price |
| 2-year |
3/31/2018 |
2.00% |
100-00 |
| 5-year |
3/15/2021 |
3.50% |
100-00 |
| 10-year |
2/28/2026 |
4.75% |
100-00 |
There are 2 portfolios, each with $100MM market value.
Portfolio I: 5-year bullet.
Portfolio II: 2-year/10-year barbell.
1) Today, you invest the $100MM in each portfolio, so that the portfolios have the same duration. The trades settle tomorrow. How much is invested in the 2-year and the 10-year?
Suppose on October 14, 2016 the 2-year ytm increases 50bp and the 10-year ytm increases 25 bp.
2) What are the price and yield of the 5-year that produce the same realized total rate of return for the bullet and the barbell for this 6-month investment period?
3) Discuss the issues/complexities involved with solving these questions.
Attachment:- Assignment.rar