September 2022
Beginner
560 pages
17h 36m
English
To replicate the 7.625s of 11/15/2022, Table 1.5 uses the 2.875s of 11/15/2021, the 2.125s of 05/15/2022, and the 1.625s of 11/15/2022. Number these bonds from 1 to 3, and let
be the face amount of bond
in the replicating portfolio. Then, the following equations express the requirement that the cash flows of the replicating portfolio equal those of the 7.625s on each of the cash flow dates. For the cash flows on November 15, 2021,
For the cash flows on May, 15, 2022,
And for the cash flows on November 15, 2022,
Solving equations (A1.1), (A1.2), and (A1.3) for
,
, and gives the replicating portfolio's face amounts reported in Table 1.5. Note that, because one bond matures ...