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

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
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 33 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) 23 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) + = + +++
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
sell 1100 P 1037.74 (1 0.06) == + HPR=(1037.74+2x100-1119.41)/1119.41=0.1057 5. Consider two annual coupon bonds, each with two years to maturity. Bond A has a 7% coupon and a price of $1,000.62. Bond B has a 10% coupon and sells for $1,055.12. Find the two one-period forward rates that must hold for these bonds. 1,000.62 = d 1 x70 + d 2 x1,070 where d1=1/(1+f 1 ) and d 2 =1/(1+f 1 )(1+f 2 ) 1,055.12 = d 1 x100 + d 2 x1,100; 2620.36 = 3000 d 2 ; d 2 = .8735; d 1 = .9427; f 1 = 6.08%; f 2 = 8.35%. 6. Answer the following questions that relate to bonds. A 2-year zero-coupon bond is selling for $873.44. What is the yield to maturity of this bond?
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 05/26/2011 for the course FIN 5530 taught by Professor Lee during the Three '11 term at University of New South Wales.

Page1 / 5

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

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online