You are a portfolio manager for a large superannuation fund. Assume it
is 16 May 2005, and your manager has advised you that $20,000,000 has
been deposited, by one of the branch offices, for payment of bonds
they have agreed to purchase for settlement today.
The bond details are:
Issuer: Commonwealth Government
Face Value: $20,000,000
Maturity Date: 15 August 2008
Coupon : 8.75%
Yield: 5.37%
Settlement date: 16 May 2005
a) If the government announces 25bp hike that the market expects. What
effect will this have on 15 August 2008 Bonds?
b) GDP rises 4 times the expected rate and the bond market sells off
50bp. In which direction will the following move (no calculations
needed)
i) the bond price ii) yield to maturity iii)coupon rate iv) the maturity
c) After careful analysis, you come to the conclusion that 6.25% 15
April 2015 CGS are likely to go "on special" soon and you want to take
advantage of this fact in the repo market by switching out of 2008 and
into 2015.
i)what is the benefit in the repo market of holding bond that is 'on special'?
ii)you successfully switch out of the short dated bonds and into the
long dated bonds. However you don't want interest rate risk or yield
risk. What do you need to do with the hedge? (short or long in futures
contract)

a) Since the yield reflects the market expectation of the 25bp
increase there is will be no change in the pric of the bond
b)  i)  fall
   ii)  falls since the price has gone down
  iii)  unchanged
   iv)  unchanged

c) ii) short a futures contract because you are long on the bond

Sorry typo.
correct B ii) to rises 
YTM will rise with fall in prices of the bond