7. (10) The following bonds are traded in a well functioning market: BOND TYPE FACE VALUE...
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7. (10) The following bonds are traded in a well functioning market: BOND TYPE FACE VALUE A Zero Coupon Bond $100 B Coupon Bond $100 COUPON MATURITY PRICE 1 year $92.00 2 years $101.32 A. Assuming that the coupon bond (bond B) makes only annual payments, what discount factors (DF1, DF2) are imbedded in these prices? (Hint: discount factor DF is defined as DF (1) ( ( B) , (DF1. DF2) ?) B. What are the 1-year, and 2-year spot rates (r, and 2)? (1 2 ?) C. What is the interest rate between the end of the first year and the end of the second year, which is implied by the two the spot rates in question B? (Hint: this is the forward rate) ( B , 1 1 ) 7. (10) The following bonds are traded in a well functioning market: BOND TYPE FACE VALUE A Zero Coupon Bond $100 B Coupon Bond $100 COUPON MATURITY PRICE 1 year $92.00 2 years $101.32 A. Assuming that the coupon bond (bond B) makes only annual payments, what discount factors (DF1, DF2) are imbedded in these prices? (Hint: discount factor DF is defined as DF (1) ( ( B) , (DF1. DF2) ?) B. What are the 1-year, and 2-year spot rates (r, and 2)? (1 2 ?) C. What is the interest rate between the end of the first year and the end of the second year, which is implied by the two the spot rates in question B? (Hint: this is the forward rate) ( B , 1 1 )
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