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Which strategy outperforms on a total rate of return basis

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Reference no: EM132215913

Question - Consider the following Treasury yield curve:

Maturity

YTM

Price

2-year

10/31/2020

2.00%

100-00

5-year

10/31/2023

3.50%

100-00

10-year

10/15/2028

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.

a) How much is invested in the 2-year and in the 10-year?

2) Suppose you believe that 9 months from today the 2-year yield will be 50 basis points higher and the 10-year yield will be 25 basis points lower.

a) Which strategy outperforms on a total rate of return basis?

3) Discuss the issues/complexities involved with solving these questions.

All your answers must be typed.

Attachment:- Assignment File.rar

Reference no: EM132215913

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