Can somebody explain Solution 3 in simple terms especially the calculations.
Why do we get into an Asset Swap and why should we neutralize duration?
How did we get the bond maturity of 9.75 yrs?
Why are we looking at swap payment in 0.25 and 0.75 years and not every 6 months?
How did the solution identify that the bond was purchased at 78.86% of par?
1 - The yield curve for the Greek is flattening as yield spreads are expected to tighten, the EUR Swap curve on the other hand is steepening. For the Greek Bond, you want to be long duration but you don’t want to be long the EUR. Best way to do this - buy the Greek Bond but also do the Swap and receive floating (lower duration) and pay fixed (higher duration)
2 - 2 year bond date is given is 4/17/19 - this means today is 4/17/17 (April 17, 2017), the 10 year is 2/17/27 (Feb 17, 2027) so we only have 9.75 years left on the bond.
3 - Because the bond has only 9.75 years left - it is maturing at 9.75 years, working back the last annual coupon was 0.25 years ago so the next one is 0.75 later.
4 - The 10-year Greek is given to be priced at 78.86 therefore the investor buys 78.86% of par and receives 100% at maturity.
Hope that helps.