The relevant annual Treasury spot curve (expressed as bond equivalent yields) is as follows: Time to...
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The relevant annual Treasury spot curve (expressed as bond equivalent yields) is as follows: Time to maturity (years) SPOT (BEY) 1 3.0% 2 3.8% 3 4.0% 4 4.4% 5 4.6% (a) Calculate the annual forward rates from the SPOT rates. (b) (7 marks) A 2-year callable annual pay bond pays a coupon of 4.2%. Interest volatility is assumed to be 15% and to follow a lognormal random walk. Calculate the value of the call. State any assumptions. (28 marks) The relevant annual Treasury spot curve (expressed as bond equivalent yields) is as follows: Time to maturity (years) SPOT (BEY) 1 3.0% 2 3.8% 3 4.0% 4 4.4% 5 4.6% (a) Calculate the annual forward rates from the SPOT rates. (b) (7 marks) A 2-year callable annual pay bond pays a coupon of 4.2%. Interest volatility is assumed to be 15% and to follow a lognormal random walk. Calculate the value of the call. State any assumptions. (28 marks)
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