Q3 There are five risk-free bonds currently trading at the following prices/yields: Yield to Maturity 8%...

   

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Q3 There are five risk-free bonds currently trading at the following prices/yields: Yield to Maturity 8% 9% unknown unknown unknown Bond A B C D E Price (at t=0) unknown 10 25.5 43.98 15.12 CF at t=1 10 0 10 25 5 CF at t=2 0 Unknown (>0) 9.8 25 6 CF at t=3 13 0 9.9 0 10 Yield to maturity is expressed as an annualized percentage rate compounded annually. (a) Calculate all forward rates, i.e., f₁2, f23, f13, using only bond A, bond B, and bond C. (b) Assuming that bonds A, B and C are correctly priced, are bond D and bond E mispriced? Are they overpriced or underpriced? Q4 On 15 January 2020, risk-free Bond A is trading at $1000, which matures on 15 January 2026 with the face value of $1000 and 10% coupon rate. Coupon rate is an annualized percentage rate and coupons are paid semi-annually. Yield to maturity is an annualized simple interest rate compounded semi-annually. (a) What are the yield to maturity, Macaulay duration, and the modified duration of Bond A? (b) Assume your company has a liability with 7 years of Macaulay duration. How would you immunize the liability using Bond A and 10-year zero coupon bonds? Q3 There are five risk-free bonds currently trading at the following prices/yields: Yield to Maturity 8% 9% unknown unknown unknown Bond A B C D E Price (at t=0) unknown 10 25.5 43.98 15.12 CF at t=1 10 0 10 25 5 CF at t=2 0 Unknown (>0) 9.8 25 6 CF at t=3 13 0 9.9 0 10 Yield to maturity is expressed as an annualized percentage rate compounded annually. (a) Calculate all forward rates, i.e., f₁2, f23, f13, using only bond A, bond B, and bond C. (b) Assuming that bonds A, B and C are correctly priced, are bond D and bond E mispriced? Are they overpriced or underpriced? Q4 On 15 January 2020, risk-free Bond A is trading at $1000, which matures on 15 January 2026 with the face value of $1000 and 10% coupon rate. Coupon rate is an annualized percentage rate and coupons are paid semi-annually. Yield to maturity is an annualized simple interest rate compounded semi-annually. (a) What are the yield to maturity, Macaulay duration, and the modified duration of Bond A? (b) Assume your company has a liability with 7 years of Macaulay duration. How would you immunize the liability using Bond A and 10-year zero coupon bonds?

Answer rating: 100% (QA)

Bond A PV Price 251f12 01f121f23 101f121f231f13 Price 25... View the full answer