Question: QUESTION THREE There are four zero-coupon bonds each with face value 10 million. Bond A matures one year from today and is selling at 9,433,962.26.

QUESTION THREE There are four zero-coupon bonds each with face value

QUESTION THREE There are four zero-coupon bonds each with face value 10 million. Bond A matures one year from today and is selling at 9,433,962.26. Bond B matures two years from today and is selling at 8,573,388.20. Bond C matures three years from today and is selling at 7,117,802.48. Bond D matures four years from today at is selling at 5,717,532.46. a) Describe the main features of coupon bonds and zero-coupon bonds. (10 marks) b) Calculate the yield to maturity of Bond B and that of Bond C. (10 marks) c) Calculate the one-year implied forward rate at the end of year 1. (10 marks) d) Calculate the one-year implied forward rate at the end of year 3. (10 marks) e) What is the usefulness of convexity when duration is used to measure interest rate risk? (10 marks) [TOTAL: 50 MARKS]

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