I added questions to give practice on key testable bond concepts; the relationship between bond price, duration and DV01 (see question 5.7) comes in handy - David 

5. Sarah is a risk manager responsible for the fixed income portfolio of a large insurance company. The portfolio contains a
30-year zero coupon bond issued by the US Treasury (STRIPS) with a 5% yield. What is the bond’s DV01? [source: FRM 2010 practice exam]

a.  0.0161
b.  0.0665
c.  0.0692
d.  0.0694

[my adds]

5.2. The question says, “The portfolio contains a 30-year zero coupon bond issued by the US Treasury…” Does the US Treasury issue STRIPS?
5.3. This question assumes semi-annual compounding (this assumption should be stated!). What is the price of this bond assuming semi-annual compounding?
5.4. What is the bond price assuming continuous compounding? (You must be able to do this calculation with ease!)
5.5. Assuming semi-annual compounding, what is, respectively, the Macaulay duration and Modified duration of this bond?
5.6. Assuming continuous compounding, what is, respectively, the Macaulay duration and Modified duration of this bond?
5.7. Assuming semi-annual compounding, solve for the bond’s DV01 as a function of the bond’s PRICE and MODIFIED DURATION. (Please focus on this question, important relationship!)
5.8 [Bonus, beyond L1] This question assumes a particular version of DV01 (by default). Can we specifically name this DV01?

Answers:

• Here in forum

See the following related questions and/or threads at the bionicturtle.com forum:

• DV01 of Treasury Bond (2009 sample)
• On the difference between duration and DV01
• P-STRIPS & C-STRIPS
• DV01 versus maturity

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