Chapter 4 solutions.doc - CHAPTER 4 Interest Rates Practice Questions Problem 4.1. A bank quotes you an interest rate of 14% per annum with quarterly

CHAPTER 4 Interest Rates Practice Questions Problem 4.1. A bank quotes you an interest rate of 14% per annum with quarterly compounding. What is the equivalent rate with (a) continuous compounding and (b) annual compounding? (a)The rate with continuous compounding is

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(b) The rate with annual compounding is 4

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Problem 4.2. What is meant by LIBOR and LIBID. Which is higher?

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Problem 4.3.The six-month and one-year zero rates are both 10% per annum. For a bond that has a life of 18 months and pays a coupon of 8% per annum (with semiannual payments and one having just been made), the yield is 10.4% per annum. What is the bond’s price? What is the 18- month zero rate? All rates are quoted with semiannual compounding. 23

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Problem 4.4. An investor receives $1,100 in one year in return for an investment of $1,000 now. Calculate the percentage return per annum with a) annual compounding, b) semiannual compounding,c) monthly compounding and d) continuous compounding.

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Problem 4.5. Suppose that zero interest rates with continuous compounding are as follows: Maturity (months)Rate (% per annum) 38.0 68.2 98.4 128.5 158.6 188.7 Calculate forward interest rates for the second, third, fourth, fifth, and sixth quarters.

The forward rates with continuous compounding are as follows to Qtr 28.4% Qtr 38.8% Qtr 48.8% Qtr 59.0% Qtr 69.2% Problem 4.6. Assuming that zero rates are as in Problem 4.5, what is the value of an FRA that enables the holder to earn 9.5% for a three-month period starting in one year on a principal of $1,000,000? The interest rate is expressed with quarterly compounding.