3 QUESTION ONE You are a junior analyst in a corporation. One of the tasks of your job is evaluating the spot rate and the forward rate of fixed income securities for your company. This is essential for security valuation, derivative valuation and interest rate forecasting. You trace the past information and get on-the-run and off-the-run yields for your corporation, which are as follows: Maturity (years) Yield to maturity (%) Market value (Trading value) 1 4.5 100 4.6 100 4.7 101.25 Suppose each bond pay coupon annually. REQUIRED: Answer the following and show all calculations. (a) Estimate the two years and three years spot rates based on these yields. (8 marks) (b) Estimate the two years and three years forward rates based on the spot curve estimated in part (a) above. (6 marks) (c) If your corporation decides to issue a 3-year corporate bond with a risk premium of 130 basis points over the benchmark spot rate that you have estimated in part (a), what is the estimated value of this corporate bond? Suppose the coupon rate of this new bond is 5% (6 marks) (d) In your own words, explain why forward rates are poor predictors of the future rates. 3 QUESTION ONE You are a junior analyst in a corporation. One of the tasks of your job is evaluating the spot rate and the forward rate of fixed income securities for your company. This is essential for security valuation, derivative valuation and interest rate forecasting. You trace the past information and get on-the-run and off-the-run yields for your corporation, which are as follows: Maturity (years) Yield to maturity (%) Market value (Trading value) 1 4.5 100 4.6 100 4.7 101.25 Suppose each bond pay coupon annually. REQUIRED: Answer the following and show all calculations. (a) Estimate the two years and three years spot rates based on these yields. (8 marks) (b) Estimate the two years and three years forward rates based on the spot curve estimated in part (a) above. (6 marks) (c) If your corporation decides to issue a 3-year corporate bond with a risk premium of 130 basis points over the benchmark spot rate that you have estimated in part (a), what is the estimated value of this corporate bond? Suppose the coupon rate of this new bond is 5% (6 marks) (d) In your own words, explain why forward rates are poor predictors of the future rates