Two (default-free) government bonds, A and B, are trading at a current market price of $80...

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Two (default-free) government bonds, A and B, are trading at a current market price of $80 and $86, respectively. Bond A is a zero-coupon bond with 1 year to maturity. Bond B is a 20% coupon bond with 2 years to maturity. Both bonds have a face value of $100. Assume any coupons are paid annually. a) Determine the 1-year spot rate. b) Determine the 2-year spot rate. c) Determine the implied forward rate between years 1 and 2. d) What is the form of the resulting term structure of interest rates? e) Answer the following: 1. ii. iii. iv. (2 marks) (4 marks) (3 marks) (2 marks) What is the yield at maturity of Bond A? (2 marks) What is the yield at maturity of Bond B? (4 marks) Using the duration approach, approximate the dollar change in the price of Bond B if its yield decreases by 1 percentage point. (2 marks) Would the magnitude of this price change be larger or smaller if Bond B was currently selling at par? Explain without the aid of any calculations. (3 marks) Two (default-free) government bonds, A and B, are trading at a current market price of $80 and $86, respectively. Bond A is a zero-coupon bond with 1 year to maturity. Bond B is a 20% coupon bond with 2 years to maturity. Both bonds have a face value of $100. Assume any coupons are paid annually. a) Determine the 1-year spot rate. b) Determine the 2-year spot rate. c) Determine the implied forward rate between years 1 and 2. d) What is the form of the resulting term structure of interest rates? e) Answer the following: 1. ii. iii. iv. (2 marks) (4 marks) (3 marks) (2 marks) What is the yield at maturity of Bond A? (2 marks) What is the yield at maturity of Bond B? (4 marks) Using the duration approach, approximate the dollar change in the price of Bond B if its yield decreases by 1 percentage point. (2 marks) Would the magnitude of this price change be larger or smaller if Bond B was currently selling at par? Explain without the aid of any calculations. (3 marks)

Answer rating: 100% (QA)

a To determine the 1year spot rate we can use the formula Spot rate Face value Current market price1... View the full answer