Problem_set_4(1)

Problem_set_4(1) - Josh Kahn, Brandon Flowers, and Tom...

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Josh Kahn, Brandon Flowers, and Tom Lilly Investments r1 0.04 Problem Set #4 r2 0.05970649 r3 0.04849366 Problem 1: 6mo 961.538462 Security Maturity Coupon Rate Current Price Face Value yr 890.48951 Security 1 6 months 3.75% $979.57 $1,000.00 18mo 867.566089 Security 2 12 months 3.50% $922.90 $1,000.00 Security 3 18 months 3.00% $908.36 $1,000.00 P 935.555941 Annual Rate a) 6 month rate 4.0% 8.00% r 10.54% 12 month rate 6.0% 11.91% 18 month rate 4.9% 9.71% P 925 Prices of zero coupon bonds: 10.5559406 arbitrage profit Maturity of 6 month: $961.54 Maturity of 12 month: $890.79 (b) buy security and sell .025 6 month zero coupon bonds Maturity of 18 month: $867.40 sell .025 12 month zero coupon bonds sell 1.025 18 month zero coupon bonds b) Cash Flow: YTM: 10.54% Year 0 1 2 3 (Using goal seek) CF -$925 $25 $25 $1,025 An arbitrage opportunity does exist (1+r/2)^n 1.053 1.1081 1.1665 I would sell the 18 month zero coupon bond to buy the treasury security. $925 = $925 c) (1 + r3)^3 = (1 + r2)^2 (1 + f2(1)) (1.049)^3 = (1.06)^2 (1 + f2(1)) f2(1) 2.64%
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Problem 2: Bond A Bond B Bond A cash flows: Price = $1,000.00 Coupon $40 annually $100 annually year 0 1 2
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This document was uploaded on 11/04/2011 for the course BUSI 580 at UNC.

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Problem_set_4(1) - Josh Kahn, Brandon Flowers, and Tom...

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