Against losses due to interest rate changes

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Reference no: EM13320076

The term structure of interest rates is currently flat r = 10%. You own a portfolio of bonds as follows:
500 bonds, each with a 9.5% coupon maturing in 7 years
1200 bonds, each with a 6% coupon, maturing in 4 years
a. You wish to hedge against losses due to interest rate changes by taking a position in 7 year discount bonds. What must the value of your position be?

b. After 4 years (when the 6% bonds have matured), how would you expect this position to have changed assuming rates remain constant up to and including that time period?

Reference no: EM13320076

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