Business, 18.06.2021 01:00 michellemonchez103
In lecture we defined quasi-modified duration as the extension of the concept of duration to the term structure framework. It is possible to extend the process of immunization to the term structure framework. A portfolio of bonds designed to fund a stream of obligations can be immunized against a parallel shift in the spot rate curve by matching both the present values and the quasi-modified durations of the bonds and the obligations. Consider the following stream of obligations, in dollars, over the next 8 years as shown in the table below below: Year 1 2 3 4 5 6 7 8 100 200 300 400 500 600 700 800 You are given the spot rate curve is as follows: Year Spot 1 7.672 8.273 8.814 9.315 9.756 10.167 10.52 8 10.85 9 11.15 10 11.42 11 11.67 12 11.89 Find a portfolio, consisting of the two bonds below, that has the same present value as the obligation stream and is immunized against an additive shift in the spot rate curve: Bond 1 is a 12-year 6% annual coupon bond Bond 2 is a 5-year 10% annual coupon bond Both bonds have a face value of $100. How many units of Bond 2 should be held in the immunized portfolio?
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In lecture we defined quasi-modified duration as the extension of the concept of duration to the ter...
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