1. A company has issued $75 million (face value) of bonds with three years to maturity. They offer an annual coupon of 2.46% above the sixth-month $LIBOR. Interest is paid every six months and the $LIBOR is currently 0.78%. Assume that the $LIBORs for the subsequent five interest set dates are as stated in the table below.

 

$LIBOR Rates
0.5 years	1 year	1.5 years	2 years	2.5 years
0.88%	1.47%	2.68%	3.28%	4.50%

 

Calculate the coupon rate and the amount of interest that the company pays at the end of each six-month period. Your mathematical workings should be clearly outlined in your written presentation.

 

2. A company has issued five-year bonds with the annual coupon and the repayment of principal linked to an index of inflation. The coupon rate is 4.75% and the principal is £100. The index of inflation is currently set at 100. Assume annual inflation rates for the next five years in the table below.

 

Inflation Rate
Year 1	Year 2	Year 3	Year 4	Year 5
0.88%	1.47%	2.68%	3.28%	4.50%

 

3. Calculate the level of the inflation index for each year and use it to determine the coupon payment per bond for each of the five years. In addition, calculate the amount that the company pays bondholders when the debt matures after five years. Your mathematical workings should be clearly outlined in your written presentation.

 

1. Explain the main characteristics of variable coupon and index-linked bonds. Discuss how they help to off-set some of the risks faced by investors in plain vanilla fixed interest securities. The discussion should include an assessment of the limitations of variable coupon and index-linked securities as assets offering protection against certain types of risk. The word count for this element should be 350-450 words.

Answer rating: 100% (QA)

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