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CHE374F2010 Problem Set #3
1.
You are given the following Tbill maturity rates and prices. Calculate the yield rates (effective
annual and continuously compounding annual) for each Tbill. Plot both yield curves.
Maturity (Months)
TBill Price
3
99.5
6
99.1
9
98.85
11
98.1
What would be the effective annual and continuously compounding annual “risk

free” rates for an
investment maturing in 7 months? You know that you will have to invest at the riskfree rate 6
months from now for a term of 5 months (i.e. you will be investing from months 6 to 11). Based on
the market conditions as given in the table, can you think of a way of determining the market’s
expectation of what the 5 month riskfree rate would be 6 months from now?
2. You are given the following price data for Tbills.
Maturity (Months)
TBill Price
2
99.4
6
98.9
8
97.85
11
97.3
Assume the riskfree rate for the first two months is flat (i.e. the two month rate is equivalent to the one month rate).
Estimate the price of a Tbill maturing in:
a)
One month
b)
five and half months
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 Fall '11
 lawrnshyn
 Capital Asset Pricing Model, rf, riskfree rate, market portfolio rate

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