Fixed Income Securities Grad Deutsche Bank: Finding Relative Value Trades Case Questions and Guidance Points:

: 25 This case should be prepared individually or with your group. Please answer the following questions, which will require building a spreadsheet for #1. For 2-4, please answer each in a few paragraphs, being clear and concise as to your reasoning. Case will be graded on accuracy of calculations, depth of analysis, and clarity of writing. (15 pts) 1. Build a zero coupon yield curve using the data from Exhibit 1. Note that you must solve for the YTMs for these bonds before building the curve (be sure to state them as BEYs in your spreadsheet). Note also that the first two bonds in the curve are NOT zero coupon bonds as in our prior examples, but rather, old coupon bonds with 6 months and 1 year remaining maturity, respectively. This will affect the formula you use to calculate the discount factor for these first two bonds. (4 pts.) 2. Which bonds should Deutsche bank consider buying, and why? Which bonds should Deutsche Bank consider short-selling, and why? (2 pts.) 3. What do you notice about the 2 and 10 year yields in the DB model versus the bootstrapped model? Why does this result occur? (4 pts.) 4. Please review the additional materials posted on Blackboard regarding bootstrapping (posted with the case assignment). What are some possible issues with the bonds used in the case to estimate the zero coupon yield curve? How might these issues affect the possible trading strategies from #2?