A FI holds $10 million of a 15 year priced at 1040 and yields 7%. The FI plans to sell them in 2 months. The bond’s duration is 9.4 years.
The FI’s analyst is predicting the Fed will raise interest rates which will push the YTM on these bonds to 8%. The analyst’s opinion is not held by most other analysts.
If the analyst is correct, what happens to the value of the bonds?
If the FI is able to hedge the position by using a two month forward contract priced at 1040, what would they do? If rates rise, what is the impact on the FI?