The below picture shows monthly interest rate swaps for 1, 2, 3, 4, 5, 7, 10, and 30 year swap rates which from July, 2000 until March, 2016.
the historical relationship between the change in the levels of rates and changes in the slope of rates.
Compare this to what has been found previously (decrease in rates is associated with a steepening on average, ect.).
Do this at the monthly level and the annual level (use March to March for annual).
We assume a face value and current price of 100. And then compute the modified duration of each swap using the MDURATION function.
We used the PRICE function to compute pseudo-bond prices based on the next month’s swap rate.
Compare the monthly return for each swap by computing the change in price, plus one month of accrued interest.
average returns and standard deviation of returns for each swap tenor. Are the return and volatility patters consistent with your expectations?
Compute the average return for multiple bullet and barbell portfolios.
Examine the 1-3-5, 1-5-10, and 5-10-30 tenor strategies. Which portfolio performs better on average and why?
Calculate the correlation between bullet – barbell returns and the change in the slope. Is this relationship consistent with what you expected?