Look one more time at Table. a. Suppose you knew the bond prices but not the spot
Question:
Look one more time at Table.
a. Suppose you knew the bond prices but not the spot interest rates. Explain how you would calculate the spot rates. (You have four unknown spot rates, so you need four equations.)
b. Suppose that you could buy bond C in large quantities at $1,040 rather than at its equilibrium price of $1,058.76. Show how you could make a zillion dollars without taking on anyrisk.
Transcribed Image Text:
Year (t) Bond Price iceYield to (PV) Maturity (y,%) 2 4 Spot rates Discount factors Bond A (8% coupon): 035 9662 9246 8839 -8418 Payment (C) PV(C) S80 $77.29 1,080 998.52 $1,075.82 3.98 Bond B (11% coupon): Payment () PV(C) $110 $106.28 110 101.70 1,110 981.11 S1,189.10 4.16 Bond C (6% coupon): Payment (C) PV(C 1060 $57.97 55.47 53.03 892.29 $1,058.76 4.37 Bond D (strip): Payment () PV(C) S1,000 $841.78 $841.78 4.40
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a Bond D allows us to calculate the four year spot rate by solving for the YTM using the 84178 price ...View the full answer
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Related Book For
Principles of Corporate Finance
ISBN: 978-0077404895
10th Edition
Authors: Richard A. Brealey, Stewart C. Myers, Franklin Allen
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