Consider the following three bonds. Bond A is a 1-year zero-coupon bond. Bond B is a...
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Consider the following three bonds. Bond A is a 1-year zero-coupon bond. Bond B is a 3- year bond that pays £150 in coupons every year and its current price in the market is P =BE 1,362.80. Bond C is a 3-year bond that pays £100 in coupons every year and its current price in the market is P = £ 1,222.64. All three bonds make a principal payment of £1,000 upon their C expiration. Finally, the one-year spot rate is equal to r = 3%. 01 Version 1 Using the no-arbitrage condition, find the fair price for bond A. [15 marks] Use the above information to estimate and plot the 3-year yield curve. [15 marks] Suppose that the yield curve that you calculated in part b changes so that the 3-year yield-to-maturity increases by one percentage point, but the 1- year and 2-year yields-to-maturity remain the same. Calculate the modified duration and the modified convexity for the three bonds. Consider the following three bonds. Bond A is a 1-year zero-coupon bond. Bond B is a 3- year bond that pays £150 in coupons every year and its current price in the market is P =BE 1,362.80. Bond C is a 3-year bond that pays £100 in coupons every year and its current price in the market is P = £ 1,222.64. All three bonds make a principal payment of £1,000 upon their C expiration. Finally, the one-year spot rate is equal to r = 3%. 01 Version 1 Using the no-arbitrage condition, find the fair price for bond A. [15 marks] Use the above information to estimate and plot the 3-year yield curve. [15 marks] Suppose that the yield curve that you calculated in part b changes so that the 3-year yield-to-maturity increases by one percentage point, but the 1- year and 2-year yields-to-maturity remain the same. Calculate the modified duration and the modified convexity for the three bonds.
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Part A Noarbitrage condition to find fair price for bond A The noarbitrage condi... View the full answer
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