tutorial6 - i(3 Explain in words the interpretation on i(3...

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TUTORIAL 6– WEEK 7 ECON3107/5106 – Economics of Finance 1. Consider the following three bonds that make the coupon payments listed below: B 1 B 2 B 3 Year 1 Year 2 Year 3 100 5 0 0 5 0 0 105 100 The prices of these bonds are as follows: p B 1 = 95 , p B 2 = 88 , p B 3 = 75 . (i) Compute the discount factors for Years 1, 2 and 3. (ii) Suppose an investor wants to receive the following payment vector: c = 50 10 20 Construct a portfolio of the three bonds that generates this payment vector. What is the arbitrage- free price of this portfolio? (iii) Compute the interest rates i (1) , i (2) and
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Unformatted text preview: i (3). Explain in words the interpretation on i (3). 2. Consider the following three bonds that make the coupon payments listed below: B 1 B 2 B 3 Year 1 Year 2 Year 3 10 5 110 5 105 100 The prices of these bonds are as follows: p B 1 = 105 , p B 2 = 93 , p B 3 = 80. (i) Compute the discount factors df(1), df(2) and df(3) implied by these bonds. (ii) Compute the (Macauley) duration of the three bonds. Note : Do not submit this tutorial assignment, since it will not be marked. 1...
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