Assignment08_A - EC3333 Financial Economics I Tutorial...

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Unformatted text preview: EC3333 Financial Economics I Tutorial 8 (Mon 25 Oct - Friday 29 Oct ) Q1: Suppose we have the following forward rate structure: Year 1-Year Forward Rate 1 5.8% 2 6.4% 3 7.1% 4 7.3% 5 7.4% a. What should be the purchase price of a 3-year zero-coupon bond be if it is purchased at the beginning of year 2 and has face value of %1 , 000? (1 mark) A: Clearly, the price should be 1 , 000 1 . 073 · 1 . 071 · 1 . 064 = 817 . 84. Note that we should use the second year, the third year and the fourth year forward rates as we consider the price at the beginning of the second year. b. Calculate the price at the beginning of year 1 of a 5% annual coupon bond with face value $1 , 000 and 5 years to maturity? (3 marks) A: 50 1 . 058 + 50 1 . 058 · 1 . 064 + 50 1 . 058 · 1 . 064 · 1 . 071 + 50 1 . 058 · 1 . 064 · 1 . 071 · 1 . 073 + 50 1 . 058 · 1 . 064 · 1 . 071 · 1 . 073 · 1 . 074 + 1 , 000 1 . 058 · 1 . 064 · 1 . 071 · 1 . 073 · 1 . 074 = 50 1 . 058 + 50 1 . 126 + 50 1 . 206 + 50 1 .....
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Assignment08_A - EC3333 Financial Economics I Tutorial...

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