Question: QUESTION TWO If the one-year zero coupon bond yield is 7% per year and the two-year zero-coupon bond yield is 8.3% per year, determine the

QUESTION TWO

  1. If the one-year zero coupon bond yield is 7% per year and the two-year zero-coupon bond yield is 8.3% per year, determine the rate on the 12x24 Forward Rate Agreement (FRA) contract.

(20 marks)

  1. Calculate the duration for a 4-year coupon paying bond with 6% annual coupon payment and which has $1 million face value, while the yield to maturity is 7%. What would be the change in the bond price if the yield to maturity rises 1 basis point (from 7% to 7.01%)?

(20 marks)

  1. What is the most crucial parameter which determines the distance to default and the respective probability of default in the KMV model? Briefly discuss.

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