Example 6.9 for reference

6.29 Consider a $100 face value bond with coupon rate of 4.0% paid semi- annually. The spot rates of interest in the market are given by j (years) 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 i (%) 5.0 5.0 4.5 4.5 4.0 4.0 3.5 3.5 3.0 3.0 Find the price of the bond if it matures in (a) 3 years, and (b) 5 years. Compare your results with those in Example 6.9. Example 6.9: Consider a $100 par bond with coupon rate of 4.0% per annum paid semiannually. The spot rates of interest in the market are given by ; (years) (%) 0.5 1.0 1.5 3.0 3.0 3.5 2.0 3.5 2.5 4.0 3.0 4.0 3.5 4.5 4.0 4.5 4.5 5.0 5.0 5.0 Find the price of the bond if it matures in (a) 3 years, and (b) 5 years. Solution: For (a), the price of the bond is 1 1 1 P = 2 + + 1.015*1.0152 * 1.01753 = $100.0608. 1 1.0175 1 + + 1.025 1 1.026 100 + 1.026 Similarly, for (b), the price of the bond is 1 1.0152 + 1 P = 2 + 1.015 $95.9328. 1 1 1 + + 1.02258 1.0259 1.02510 + 100 1.02510