You are working as Fixed Income Analyst, and you would like to use term-structure techniques to...
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You are working as Fixed Income Analyst, and you would like to use term-structure techniques to price corporate bonds. You are given the following term structure: Years 1 2 3 Spot rate 5.0% 6.0% 6.5% Forward rate www =1₂ fj a) Determine the values f2 and f3 representing the forward rates for years 2 and 3 respectively (as shown in the table above). (2 marks) b) What will the spot rate be once one year has passed? (1 mark) c) You are trying to price a $1000 (face value) corporate bond using the term- structure above. The bond is a 15-year bond with 3 years left to maturity. The annual coupon rate is 7%. You can assume that the bond has just made a coupon payment and has 3 coupon payments left and exactly 3 years to maturity (3 marks). You are working as Fixed Income Analyst, and you would like to use term-structure techniques to price corporate bonds. You are given the following term structure: Years 1 2 3 Spot rate 5.0% 6.0% 6.5% Forward rate www =1₂ fj a) Determine the values f2 and f3 representing the forward rates for years 2 and 3 respectively (as shown in the table above). (2 marks) b) What will the spot rate be once one year has passed? (1 mark) c) You are trying to price a $1000 (face value) corporate bond using the term- structure above. The bond is a 15-year bond with 3 years left to maturity. The annual coupon rate is 7%. You can assume that the bond has just made a coupon payment and has 3 coupon payments left and exactly 3 years to maturity (3 marks).
Expert Answer:
Answer rating: 100% (QA)
a To determine the forward rates we can use the relationship between spot rates and forward rates 1 s22 1 s11 f2 1 s33 1 s11 f21 f3 Given the spot rat... View the full answer
Related Book For
Fundamentals of Financial Management
ISBN: 978-1337395250
15th edition
Authors: Eugene F. Brigham, Joel F. Houston
Posted Date:
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