Question Chapter 4

Chapter 4 1- A bank quotes you an interest rate of 14% per annum with quarterly compounding. 1What is the equivalent rate with (a) continuous compounding and [h] annual compounding? Ans 2- The sixmonth and oneyear zero rates are both 10% per annum. For a bond that has a life of 13 months and pays a coupon of 3% per annum [with semiannual payments and one having just been made), the yield is 10.4% per annum 1What is the hond's price? What is the 13month zero rate? All rates are quoted with semiannual compounding. Ans 3- Assume that a hank can borrow or lend at the rates of 9% continuous compounding, what is the value ofan FRA where it will earn 9.5% for athreemonth period starting in one year on aprincipal of $1,000,0? The interest rate is expressed with quarterly compounding- Ans 4- Suppose that (iimonth= 12month, 18month, 24-month, and Ellmonth zero rates are 4%, 4.2%, 4.4%, 4.6%, and 4.3% per annum with continuous compounding respectively. Estimate the cash price of a bond with a face value of 11110 that will mature in 3D months and pays a coupon of 4% per annum semiannually. Ans 5- A veyear bond with a yield of 11% (continuously compounded) pays an 3% coupon at the end of each year. a] What is the band's price? b] \"That is the band's duration? c] Use the duration to calculate the effect on the hond's price of a DIE: decrease in its yield. d] Recalculate the band's price en_the_ha_s_i_set' a 10.3% per annum yield and verify that the result is in agreement with your answer to (c)- Ans