In a market where spot rates apply, the two$-$year forward rate of interest at time t$=1$ is $6\%$ per annum effective.

The issue price per $100$ nominal of a two$-$year fixed interest bond that pays annual coupons of $4\%$ in arrears and is redeemed at $105\%$ is $95\mathrm{.}5.$

At the same time, the issue price per $100$ nominal of a three$-$year fixed interest bond that pays $6\%$ in arrears and is redeemed at par is $98\mathrm{.}5.$

$($i$)$ Calculate all possible annual spot$-$rates.

$($ii$)$ Calculate the three$-$year par yield.

Answer rating: 100% (QA)

Answer i Let r1 r2 nd r3 be the annual effective spot Interest rates 1... View the full answer