Question: The 6-months zero rate is 8.60% per annum with continuous compounding. The price of a one-year bond that provides a coupon of 10% per annum

The 6-months zero rate is 8.60% per annum with continuous compounding. The price of a one-year bond that provides a coupon of 10% per annum semi-annually is 98. The par value of bond is 100.

Part I.

What is the one-year zero rate measured in continuous compounding?

(5 marks)

Part II.

What is the forward rate from 6-months to 1-year inferred from todays zero rate curve?

(3 marks)

Part III.

The yield-to-maturity of above one-year bond is 12.16% per annum semi-annual compounding. If the bonds yield-to-maturity remains constant, then six months later, will the bond price be higher, lower, or unchanged? Please justify your answer.

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