70.2K

Verified Solution

Link Copied!

1. Given the above spot rate/zero coupon yield curve(continuously compounded), please calculate the prices of zero-coupon bonds of all maturities.

2. What is the return earned by each zero-coupon bond over 1 year if the yield curve doesnt move?

3. Assume that you have a 5-year investment horizon. What is the total returnyou earn for each of the following strategies if the yield curve does not move?

i.Buy and HoldBuy the 5-year bond and hold to the maturity

ii.Riding the Yield CurveBuy the 5yr bond, hold for one year, then sell when it has 4 years left to maturity, buy another 5yr bond, repeat

iii.Bond LadderStart by investing 20% of your wealth in bonds of each maturity. At the end of the first year, when the 1yr bond matures, invest the proceeds in a new 5yr bond, repeat.

4.Please comment on the duration of these strategies given the assumptions in (c)

5.Suppose you are to invest 1 million HKDin bondsand the monthly change in the interest rate always follows a normal distribution with mean 4.7110^-5 and standard deviation 0.00432, please comment on the VaR of these strategiesgiven the assumptionsin (c)

6.Given the assumption in (c)and (e), please comment on the expected shortfall of these strategies.

Maturity (in years) 1 2 3 4 5 Spot rate p.a. 3.05% 4.43% 5.38% 6.05% 6.34% Maturity (in years) 1 2 3 4 5 Spot rate p.a. 3.05% 4.43% 5.38% 6.05% 6.34%

Answer & Explanation Solved by verified expert

See Answer