Question: Part A (5 marks) Suppose that zero interest rates with continuous compounding are as follows. Maturity (years) Rate (% p.a.) 1 4 2 4.6 3

Part A (5 marks) Suppose that zero interest rates with continuous

Part A (5 marks) Suppose that zero interest rates with continuous compounding are as follows. Maturity (years) Rate (% p.a.) 1 4 2 4.6 3 8 i) Estimate the price of a bond with a face value of 100 that will mature in 2 years and pays an annual coupon of 8% per year. (2 marks) ii) Assume the term structure in the table provides a fair forecast of the future interest rates. If an investor invests $1 at the end of this year (i.e. the end of year 1) and hold the investment for 2 years, how much will he/she obtain in total by the end of year 3

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