The following information about bond prices are provided:

Maturity (in years)	Coupon Rate (p.a. semi-annual compounding)	Bond Price
0.5	0	$99.50
1.0	4%	$102.50
1.5	8%	$109.00
2.0	4%	$100.00

(All bonds have a face value of $100. Coupon rates are expressed with semi-annual compounding)

Required:

(a)       Calculate the continuously compounded zero rates for the bonds above. Record your answers to 3 decimal places in percentage i.e. x.xxx% or 0.xxxxx.

(b)       What are the forward rates for the periods: 6 months to 12 months, 12 months to 18 months, 18 months to 24 months?

(c)       Use the zero rates you calculated from part (a) to estimate the price of a two-year bond providing a semi-annual coupon of 7% per annum and a face value of $100.

Answer rating: 100% (QA)

Maturity in yrs Bond Prices 050 100 150 200 Coupon rate semi annual compoun... View the full answer