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problem1: Assume the price of a two year Treasury strip is 950 dollars & the price of a Ford zero-coupon note of a similar maturity is 900 dollar. Par is 1,000 dollars for both securities. Compute the yield spread of a Ford note. Use semiannual compounding.

problem2: You believe that the yield curve is going to steepen very soon, more specifically; a fall in short term rates & a rise in long-term rates is expected. Estimate the strategy should you pursue in the bond market to position yourself to profit from your beliefs?

Clue: You need to think about your investment horizon & immunization strategy. Based on what traders say, this strategy has originated with the Salomon Bond arbitrage ["bond-arb"] group. However, it is so well known that profits may be slim nowadays.

Basic Finance, Finance

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