Calculate the bond duration

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Reference no: EM132804329

Question - You are a portfolio manager running a fixed income portfolio all of one bond. The bond is XYZ bond with a YTM of 5%, coupon 8%, term 6 years semi-annual, BBB credit rating. The reinvestment rate assumption is 3%.

You have a $500M pension liability with a duration of 8 years.

Two derivative instruments available are:

a) Tbond futures, priced at 97 with a duration of 3 and

b) Interest rate swaps with a duration of 3.

Required -

A) Calculate the bond duration.

B) Calculate the # of bonds needed to fund the liability.

C) Explain the conditions to immunize the portfolio using a classical duration-match immunization.

D) Provide the number of Tbond contracts.

E) If the reinvestment rate falls from 3% to 1%, provide the projected deficit.

F) Provide the NP (notional principal of Interest Rate Swaps to hedge)

G) Prove that the futures gain will > the loss attributed to the deficit.

H) Prove that the IRS (interest rate swap) gain will > the loss attributed to the deficit.

I) Indicate the type of swap needed.

Reference no: EM132804329

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