The estimated spot rates are as follows: r1=6%, r2=6.4%, r3-6.7%, r4-6.9%, r5-7%. Please answer the following...

Transcribed Image Text:

The estimated spot rates are as follows: r1=6%, r2=6.4%, r3-6.7%, r4-6.9%, r5-7%. Please answer the following questions i) What are the discount factors (i.e. 1/(1+rd)^t) for dates t=1, t=2, t=3, t=4 and t=5? ii) Calculate the present value of a 6% annual, five-year coupon bond, with $100 face value. iii) Calculate the present value of a 12% annual, five-year coupon bond, with $100 face value. iv) Consider a five-year coupon bond, that is, a bond that pays a fixed amount equal to 10 in years 1, 2,..., 5 (i.e. 10 is a combination of coupons and face value, and it is the same every year -it is a constant payment bond). What is the yield to maturity of this bond? v) Explain intuitively why the yield on the five-year bond described in part (b) must lie between the yield on a five-year zero-coupon bond and the five-year annuity described in part (d). You do not need to compute the yield to maturity to answer this question. The estimated spot rates are as follows: r1=6%, r2=6.4%, r3-6.7%, r4-6.9%, r5-7%. Please answer the following questions i) What are the discount factors (i.e. 1/(1+rd)^t) for dates t=1, t=2, t=3, t=4 and t=5? ii) Calculate the present value of a 6% annual, five-year coupon bond, with $100 face value. iii) Calculate the present value of a 12% annual, five-year coupon bond, with $100 face value. iv) Consider a five-year coupon bond, that is, a bond that pays a fixed amount equal to 10 in years 1, 2,..., 5 (i.e. 10 is a combination of coupons and face value, and it is the same every year -it is a constant payment bond). What is the yield to maturity of this bond? v) Explain intuitively why the yield on the five-year bond described in part (b) must lie between the yield on a five-year zero-coupon bond and the five-year annuity described in part (d). You do not need to compute the yield to maturity to answer this question.

Answer rating: 100% (QA)

i To calculate the discount factors we can use the formula Discount factor 1 1 rt where r is the spo... View the full answer