The following table provides prices of 4 government bonds with different time to maturity, with a coupon of 8% and a par value of $100.

1. a. Calculate the yield curve for years 1-4? Is the curve going up or down?

2. b. What is the current expectation to the interest rate for two years starting in 2 years (???? )?

3. c. In two year from now you want to take on a loan of $500, which you plan to pay back at year t=4.
   How can you guarantee the interest rate on this loan based on today's prices, if there is not market for forward interest contracts? show complete numerical solution

4. d. The duration of a (different) fixed coupon bond with a maturity of 4 years is 3.50465. What is the bond's coupon rate? If interest rates rise by 2%, by how much will the price of the bond go up or down?

 

Transcribed Image Text:

Time to maturity 1 2 3 4 Price $ 105.882 $ 109.643 $ 110.024 $ 107.940 Time to maturity 1 2 3 4 Price $ 105.882 $ 109.643 $ 110.024 $ 107.940

Answer rating: 100% (QA)

Formulas Used c borrow 50012962 47166 for the 4 years at the rate of 572 now as we need this am... View the full answer