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Part a. Consider a flat yield curve where the continuously compounded interest rate is 10%. Calculate and graph the performance profile for a four-year zero-coupon bond, for a four-year 10% coupon bond (with annual coupon payments), and for a four-year 20% coupon bond (with annual coupon payments).
Part b. Calculate the dollar durations (Dollar Deltas), durations (Omeg’s) and Gammas of the three bonds above.
Part c. What portfolio combination of the four-year zero-coupon bond and four-year 20% coupon bond will have the same value and duration as $1,000,000 in the four-year 10% coupon bond?
Part d. Explain why the portfolios from the previous part have similar risk.
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