2. Consider a bullet bond with 6% coupon rate, semi-annual payments, 2 years remaining to maturity,...

 

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2. Consider a bullet bond with 6% coupon rate, semi-annual payments, 2 years remaining to maturity, and a principal of 100 (the latest coupon payment today has just been made and is not taken into account). Suppose that we have the following curve of continuously compounded zero-coupon annual interest rates Maturity (years) ZC rate (%) 1.5 1.8 2.2 2.9 0.5 1 1.5 2 (a) [5 marks] Find the price of the bond. (b) [5 marks] Verify that the yield is 2.86% continuously compounded. (c) [5 marks] Find the duration of the bond. Estimate the effect on the bond price if the yield falls to 2%. (d) [5 marks] Consider another bond with 8% coupon rate with semi-annual pay- ments, 2 years remaining to maturity, and a principal of 100. Is this new bond more or less sensitive to changes in interest rates? Justify your answer. 2. Consider a bullet bond with 6% coupon rate, semi-annual payments, 2 years remaining to maturity, and a principal of 100 (the latest coupon payment today has just been made and is not taken into account). Suppose that we have the following curve of continuously compounded zero-coupon annual interest rates Maturity (years) ZC rate (%) 1.5 1.8 2.2 2.9 0.5 1 1.5 2 (a) [5 marks] Find the price of the bond. (b) [5 marks] Verify that the yield is 2.86% continuously compounded. (c) [5 marks] Find the duration of the bond. Estimate the effect on the bond price if the yield falls to 2%. (d) [5 marks] Consider another bond with 8% coupon rate with semi-annual pay- ments, 2 years remaining to maturity, and a principal of 100. Is this new bond more or less sensitive to changes in interest rates? Justify your answer.

Answer rating: 100% (QA)

a To find the price of the bond we need to calculate the present value of the bonds future cash flows which include the coupon payments and the principal repayment Given Coupon rate 6 Semiannual payme... View the full answer