a) Assume that the (annual) spot rates for maturities strictly shorter than 4 years, given on...

 

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a) Assume that the (annual) spot rates for maturities strictly shorter than 4 years, given on a semi-annual basis are given in the table below: Maturity (years) 0.5 1 1.5 2 2.5 3 3.5 Spot rate 5% 5.5% 5.2% 5.7% 6% 6.2% 6.8% What is the 4-year spot rate, knowing that the Government bonds expiring 4 years from now have a coupon rate of 5.8% and are quoted at £92 per £100 nominal? (30%) b) A customer wants to buy £10m against dollars 3-month forward from a bank. The 3-month sterling interest rate is 2%, the 3 month dollar interest rate is 1%. The spot bid rate is 1.2530 $/£, while the spot ask/offer is 1.2560 $/£. Calculate the 3-months forward exchange rate on the assumption that the covered interest rate parity holds. (20%) c) A worker is planning to retire in 35 years' time with a pension fund valued at £300,000. What is the annual pension contribution if the rate of return on investment is 6%? (20%) d) A UK Government bond with a coupon of 5% will be redeemed at par on the 1st of June 2020. The coupon payment dates are June 1st and November 30th. What is the clean price of the bond on the 27th of May 2015, if the yield to maturity is 7%? (30%) a) Assume that the (annual) spot rates for maturities strictly shorter than 4 years, given on a semi-annual basis are given in the table below: Maturity (years) 0.5 1 1.5 2 2.5 3 3.5 Spot rate 5% 5.5% 5.2% 5.7% 6% 6.2% 6.8% What is the 4-year spot rate, knowing that the Government bonds expiring 4 years from now have a coupon rate of 5.8% and are quoted at £92 per £100 nominal? (30%) b) A customer wants to buy £10m against dollars 3-month forward from a bank. The 3-month sterling interest rate is 2%, the 3 month dollar interest rate is 1%. The spot bid rate is 1.2530 $/£, while the spot ask/offer is 1.2560 $/£. Calculate the 3-months forward exchange rate on the assumption that the covered interest rate parity holds. (20%) c) A worker is planning to retire in 35 years' time with a pension fund valued at £300,000. What is the annual pension contribution if the rate of return on investment is 6%? (20%) d) A UK Government bond with a coupon of 5% will be redeemed at par on the 1st of June 2020. The coupon payment dates are June 1st and November 30th. What is the clean price of the bond on the 27th of May 2015, if the yield to maturity is 7%? (30%)

Answer rating: 100% (QA)

a To calculate the 4year spot rate we can use the concept of bootstrapping Since we have spot rates for various maturities we can use them to derive t... View the full answer