03rec2_exercise

03rec2_exercise - MIT Sloan School of Management J. Wang...

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Unformatted text preview: MIT Sloan School of Management J. Wang 15.407 E52-456 Fall 2003 Examples Sept 25, 03 1. (20 points) The Wall Street Journal gives the following bond prices: (Each bond has a principle of $1,000.) Bond Maturity (years) Coupon rate (%) Price ($) Spot Interest Rate ($) 1 1 0.00 A 2% 2 2 2.00 1,000 B 3 3 C 1,000 4% (a) Calculate the price of the 1-year bond (A), the 2-year spot interest rate (B) and the appropriate coupon rate for the 3-year bond (C). (b) Calculate the forward rate from year 2 to year 3. Answer: A = 1 , 000 1 . 02 = 980 . 39 30 1 . 02 + 1030 (1+ B ) 2 = 1000 B = 2% 1000 C * ( 1 1 . 02 + 1 (1 . 02) 2 + 1 (1 . 04) 3 ) + 1000 (1 . 04) 3 = 1000 C = 3.92% f 2 = (1 . 04) 3 (1 . 02) 2- 1 = 8 . 12% 2. (Gibbons) The following table provides some relevant information. For all of the fol- lowing bonds, you may assume that the face or par value is $100.00. All the following bonds are constant coupon bonds where the next coupon is to be received in one year....
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This note was uploaded on 01/19/2011 for the course 15 15.407 taught by Professor Wang during the Fall '03 term at MIT.

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03rec2_exercise - MIT Sloan School of Management J. Wang...

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