Consider an inverse floating rate coupon bond with 1 year remaining to maturity. On maturity, bondholders...

 

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Consider an inverse floating rate coupon bond with 1 year remaining to maturity. On maturity, bondholders are expected to receive $100 face value. Coupons are paid quarterly and the current 3-mth LIBOR observed rate is 5.234% p.a. The annual coupon rate is specified as: Annual coupon rate = 20% p.a. - 3C where C is the annual 3-mth LIBOR rate. Assume, for simplicity, that the annual 3-mth LIBOR rate will never exceed 6.67% p.a. (so that the annual coupon rate defined above is always a positive number). The following table shows the current LIBOR continuously compounded rate with different maturities: Maturity 1 2 234 56 5 6 LIBOR 5.0% p.a. 5.1% p.a. 5.2% p.a. 5.3% p.a. 5.3% p,a. 5.4% p.a. Maturity 7 8 9 10 11 12 LIBOR 5.5% p.a. 5.5% p.a. 5.6% p.a. 5.7% p.a. 5.8% p.a. 5.9% p.a For example, the 1-mth LIBOR is 5.0% p.a. compounded continuously. You can treat the LIBOR rates presented in table above as the discount rates/spot rates with different maturities. Required: What is the current price of the inverse floating rate coupon bond? Show all of your workings. Consider an inverse floating rate coupon bond with 1 year remaining to maturity. On maturity, bondholders are expected to receive $100 face value. Coupons are paid quarterly and the current 3-mth LIBOR observed rate is 5.234% p.a. The annual coupon rate is specified as: Annual coupon rate = 20% p.a. - 3C where C is the annual 3-mth LIBOR rate. Assume, for simplicity, that the annual 3-mth LIBOR rate will never exceed 6.67% p.a. (so that the annual coupon rate defined above is always a positive number). The following table shows the current LIBOR continuously compounded rate with different maturities: Maturity 1 2 234 56 5 6 LIBOR 5.0% p.a. 5.1% p.a. 5.2% p.a. 5.3% p.a. 5.3% p,a. 5.4% p.a. Maturity 7 8 9 10 11 12 LIBOR 5.5% p.a. 5.5% p.a. 5.6% p.a. 5.7% p.a. 5.8% p.a. 5.9% p.a For example, the 1-mth LIBOR is 5.0% p.a. compounded continuously. You can treat the LIBOR rates presented in table above as the discount rates/spot rates with different maturities. Required: What is the current price of the inverse floating rate coupon bond? Show all of your workings.

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