Unformatted text preview: 5. Consider U.S. government coupon bonds of maturity = 12345 that all have face value $100 and pay annual coupons. Suppose the coupon rates are 1%, 2%, 3%, 4%, 5% respectively. Let the prices of all the bonds be $99. Using excel find the forward rates in the United States. Now suppose that in Argentina there are dollar denominated coupon bonds of maturity = 12345 that all have face value $100 and pay annual coupons. Suppose the coupon rates are 2%, 4%, 7%, 11%, 16% respectively. Let the prices of all the bonds be $99, $98, $97, $96, $95, respectively. Using excel find the forward rates in Argentina. Assume that if any Argentine bond defaults, they all default from then on and all pay zero from then on. Assuming risk neutral investors, what is the implied probability of default each year for Argentine bonds? Solution: (a) Let be the zero prices of US Treasury. The first equation gives . Plug it into the second equation, we have Similarly, we could calculate , which are 0.90, 0.84, and 0...
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This note was uploaded on 01/20/2013 for the course ECON 251 taught by Professor Geanakoplos,john during the Spring '09 term at Yale.
- Spring '09