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It is early December 2004. Your employer, the Canada Mortgage and Housing Corporation, is about to purchase a $1 billion pool of mortgage loans from several banks in Ontario. Your team has been placed in charge of the funding and risk management of this pool. The goal is to issue a conventional bond that will appeal to investors, in such a way as to closely match the interest rate risk characteristics of pool. The details of the pool, simplified for computational purposes, are shown below.

ONTARIO MORTGAGE POOL

Pool total	C$1000 million
Pool interest rate	7.3%
Pool maturity date	10 years
Principal amortization	Equal-payment amortizing loans
Principal amortization period	25 years
Pool payment frequency	Annual
Assumed annual principal prepayment	C$20 million

The following chart illustrates the paydown structure of the loan pool.

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Assignments:

Your task is to manage the interest rate risk of the mortgage loan pool.

• First, you will recommend a bond that could be issued to fund the pool. The bond must be a fixed coupon, bullet maturity noncallable bond. You may use this spreadsheet: loan_amortization.xls
• Next, assume that the pool is funded with part of the 3.75% Canada Housing Trust bond issued December 15, 2004 and maturing March 15, 2010. A summary of the bond's terms may be found here: canada_mortgage_bond.pdf. What is the duration mismatch between the asset and the liability?
• Finally, recommend a hedging program that minimizes the CMHC's interest rate risk. How could CMHC reduce the duration mismatch by using
• futures?
• swaps?
• Use this spreadsheet: portfolio_duration.xls