Computation of yield from investment.
1. Suppose the price of a 2-year Treasury strip is $950 and the price of a Ford zero-coupon note of a similar maturity is $900. Par is $1,000 for both securities. Calculate the yield spread of a Ford note. Use semi-annual compounding.
2. You believe that the yield curve is going to steepen very soon, more specifically; a fall in short-term rates and a rise in long-term rates are expected. What strategy should you pursue in the bond market to position yourself to profit from your beliefs?
Hint. You need to think about your investment horizon and 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