EXCH08 - PRACTICE PROBLEMS CHAPTER 8 YIELD CURVE AND TERM...

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PRACTICE PROBLEMS CHAPTER 8: YIELD CURVE AND TERM STRUCTURE ANALYSIS NOTE: for this problem set assume all interest rates are compounded semi-annually . Exercise 8.1: Assume the following spot rate (zero coupon) curve for this problem. Years 0.5 1.0 1.5 2.0 2.5 Rate 7.50 7.75 8.00 8.00 8.00 (a) If all bonds are priced consistently with this curve, what would be the price of a two- year semi-annual, 14% coupon security? (b) Find the par bond yield curve. (c) Use linear interpolation to find the spot rates with maturities 10 months and 14 months. (d) Find the forward rate curve, f 0 ( i , i + 2 1 ), for i = 0.5, 1, 1.5, 2. Using the spot rates in part (c), find the forward rate f 0 (1, 14/12). Exercise 8.2: The data in the next table reflects the conditions on October 8, 1985. Coupon Maturity Price YTM 9% 9/15/1987 100 3 32 8.96% 10 5 8 % 8/15/2015 100 10 5 8 % You expect the yield curve will flatten, but you have no clue as to whether the over-all interest rates will rise or fall. Using the two securities suggest a “spread trade” that is consistent with your expectations. Exercise 8.3: Assume the following spot rate (zero coupon) curve for this problem. Years 0.5 1.0 1.5 2.0 2.5 Rate 11.00 10.50 10.00 9.50 9.00 Two-year bonds that are strippable and paying a coupon of 10.375% are selling at a yield of 10%. Is it worthwhile to strip them and sell the stripped pieces? Or is it better to sell them as a unit? (Assume that you own them and that the strips may be sold at spot yields.) Exercise 8.4: Given the following data, find the zero coupon curve by using the bootstrap method. (Coupons are paid semi-annually.) Coupon Maturity ( years ) Price ( decimal ) 7% 0.5 101.00 4% 1.0 98.82 8% 1.5 103.68 Exercise 8.5: You’re given the following data. (Coupons are paid semi-annually.) Coupon Maturity ( years ) Price ( decimal ) 6% 1.0 99.72 8% 1.0 101.63 5% 1.5 98.03 If A = 5 . 102 5 . 2 5 . 2 0 104 4 0 103 3 and (from EXCEL) A 1 =
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This note was uploaded on 04/11/2011 for the course FINS 5536 taught by Professor No during the Three '11 term at University of New South Wales.

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EXCH08 - PRACTICE PROBLEMS CHAPTER 8 YIELD CURVE AND TERM...

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