Section _2 Bonds

# Section _2 Bonds - Section#2 Solutions Bond Exercises...

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Section #2 Solutions Bond Exercises September 8th, 2010 Copyright 2010 by Rich Curtis

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1. Bond Yields, Spot Rates, and Forward Rates Time 0 Time 1 Time 2 Time 3 Price CF CF CF 1-Year Note: \$10,381 \$10,900 2-Year Note: \$10,282.60 \$750 \$10,750 3-Year Note: \$9,841.40 \$600 \$600 \$10,600
Yield-to-Maturity Expression P 0 = CF 1 1+ y + CF 2 (1+ y) 2 + CF 3 (1+ y) 3 + . .. + CF T (1+ y) T Spot Rate Expression P 0 = CF 1 1+ r 0,1 + CF 2 (1+ r 0,2 ) 2 + CF 3 (1+ r 0,3 ) 3 + . .. + CF T (1+ r 0,T ) T Forward Rate Expression P 0 = CF 1 1+ r 0,1 + CF 2 (1+ r 0,1 )(1+ f 1,2 ) + CF 3 (1+ r 0,1 )(1+ f 1,2 )(1+ f 2,3 ) + . .. + CF T (1+ r 0,1 )(1+ f 1,2 )(1+ f 2,3 ) . .. (1+ f T -1,T )

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a. Use the 1-year Treasury Note and solve the spot rate expression for r 0,1 : P 0 = CF 1 1 + r 0,1 \$10,381.00 = \$10,900.00 1 + r 0,1 r 0,1 = .05
b. Use the 3-year Treasury Note and the yield-to-maturity expression: P 0 = CF 1 1+y + CF 2 (1+y) 2 + CF 3 (1+y) 3 It can be shown that y = .066 or 6.60%. \$9,841.40 = \$600 1 + y + \$600 (1 + y) 2 + \$10,600 (1 + y) 3

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c. Use the 1-year spot rate r 0,1 and the 2–year Treasury Note to solve the forward rate expression for f
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## This note was uploaded on 09/24/2011 for the course HADM 2225 taught by Professor Wellman, j during the Spring '08 term at Cornell.

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Section _2 Bonds - Section#2 Solutions Bond Exercises...

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