Term Structure of Interest Rates

Term Structure of Interest Rates - Term Structure of...

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

View Full Document Right Arrow Icon
Term Structure of Interest Rates – Practice Questions Notes: I will ask you a very similar question on your exams as questions I have included below. 1. You are given the following information about a bond: Par amount: $1,000 Term to maturity: 3 years Annual coupon =6% payable annually Term Annual Spot Interest Rates 1 7% 2 8% 3 9% a) Find the value of the bond First, find coupon payment: 1,000 * 6% = $60 60/1.07 + 60/(1.08)^2 + (1000+60)/(1.09)^3 = 926.03 b) Find the annual effective yield rate for the bond if the bond is sold at a price equal to its value. “equal to its value” means the price calculated in part a), not the par amount (i.e. 1000). 926.03=60/r(1-1/(1+r)^3) + 1000/(1+r)^3 N=3; PV=926.03; PMT=-60; FV=1000; CPT I/Y = 8.9% 2. You are given the following: Term Spot Interest Rate 1 5.00% 2 5.75% 3 6.25% 4 6.50% A three-year annuity-immediate will be issued a year from now with annual payments of 5,000. Using the forward rates, calculate the present value of this annuity a year from now.
Background image of page 1

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

View Full DocumentRight Arrow Icon
Notes: in class I confused everyone with my comment with what annuity-immediate means. I should have said that annuity immediate is just an ordinary annuity with payment at the end of the period. An annuity due, however, makes payments at the beginning of the year! I made the same mistake we preach to students about in interest theory The only difficult thing about this question is figuring out the timeline. 5,000
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.

Page1 / 5

Term Structure of Interest Rates - Term Structure of...

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