Hey guys, I’m in book 4 (2006) and I am having trouble figuring this arb. spread question. Let me know what you think. "You predict the yield btw the 4 and 10 year diverge. 4-year has mod dur. of 2.5 and YTM of 3.00% and 10. of 6.25. and YTM of 5.00%. A. If both YTM rise (4-year +.20% and 10-year + .50)%, what would be your capital gain? YTM fall (4-year -.45%, 10-year -.25%), what is your capital loss? B. Assume the 4-year remains steady but the 10-year rise .15%, what is your capital gain?
Didn’t we do this yesterday?