$$\begin{array} { | c | c | c | c | c | }
\hline \text { Bond } & \text { Coupon Rate } & \text { Maturity } & \text { Price } & \text { Yield } \
\hline \text { T-Note Strip } & 0 & 10 & 70.69 & 3.5 \% \
\hline \text { T-Bill } & 0 & 1 & 96.62 & 3.5 \% \
\hline \text { 8-year T-Note } & 5 \% & 8 & 110.31 & 3.5 \% \
\hline \text { 7-year T-Note } & 6.5 \% & 7 & 118.34 & 3.5 \% \
\hline
\end{array}$$ Each bond in the table has a face value of $100. The coupon bonds pay annual coupons, and the next coupon is due in one year. Assume that the yield curve is flat and all yields are currently 3.5%. If interest rates are forecast to rise to 4% from 3.5%, what is your profit if you short-sell the bond with the biggest anticipated (percentage)decline. (Assume you short-sell only one bond.)

Question

$$\begin{array} { | c | c | c | c | c | } 
\hline \text { Bond } & \text { Coupon Rate } & \text { Maturity } & \text { Price } & \text { Yield } \
\hline \text { T-Note Strip } & 0 & 10 & 70.69 & 3.5 \% \
\hline \text { T-Bill } & 0 & 1 & 96.62 & 3.5 \% \
\hline \text { 8-year T-Note } & 5 \% & 8 & 110.31 & 3.5 \% \
\hline \text { 7-year T-Note } & 6.5 \% & 7 & 118.34 & 3.5 \% \
\hline
\end{array}$$ Each bond in the table has a face value of $100. The coupon bonds pay annual coupons, and the next coupon is due in one year. Assume that the yield curve is flat and all yields are currently 3.5%. If interest rates are forecast to rise to 4% from 3.5%, what is your profit if you short-sell the bond with the biggest anticipated (percentage)decline. (Assume you short-sell only one bond.)

Quizplus · Accepted Answer

The bond with the biggest anticipated percentage decline when interest rates rise is the 7-year T-Note with a 6.5% coupon. When rates rise, longer-duration bonds with higher coupons tend to decline more in price. The profit from short-selling is the difference in price due to the rate change, which is approximately $3.13.

Each Bond in the Table Has a Face Value of |