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PS2 Answers - Problem Set 2 Answers The following is a list...

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Problem Set 2 Answers The following is a list of prices for zero coupon bonds with different maturities and par value of $1,000. Use this information for solving problems 1-3. Maturity (Years) Price Spot rate Forward rate 1 $952.38 5% 5% 2 $873.44 7% 9.04% 3 $827.85 6.5% 5.51% 4 $792.09 6% 4.51% 1.What is, according to the expectations theory, the expected forward rate in the fourth year? 4 4 4 4 3 3 3 (1 y ) (1 0.06) f 0.0451 (1 y ) (1 0.065) + + = = = + + 2.What is the price of a 4-year maturity bond with a 10% coupon rate paid annually? (Par value = $1,000) 2 3 4 100 100 100 1100 P 1136.67 1 0.05 (1 0.07) (1 0.065) (1 0.06) = + + + = + + + + 3.You have purchased a 3-year maturity bond with a 10% coupon rate paid annually. The bond has a par value of $1,000. What would the price of the bond be one year from now if the implied forward rates stay the same? 100 1100 P 1047.83 (1 0.0904) (1 0.0904)(1 0.0551) = + = + + + Given the following pattern of forward rates, solve problem 4: Year Forward Rate 1 4% 2 6% 3 7% 4. If one year from now the term structure of interest rates changes so that it looks exactly the same as it does today, what would be your holding period return if you purchased a 3-year 10% annual coupon bond today and held it for 2 years? buy 100 100 1100 P 1119.41 (1 0.04) (1 0.04)(1 0.06) (1 0.04)(1 0.06)(1 0.07) = + + = + + + + + +
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