You observe the trading price of the following annual zero-coupon and coupon paying Government (risk-free) bonds:...
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You observe the trading price of the following annual zero-coupon and coupon paying Government (risk-free) bonds: Maturity 1 2 3 4 Coupon 0% 6% 10% 0% Price $96.62 $99.56 $102.88 $62.53 You use these bond prices to derive the pure yield curve. Importantly, you have been told that the pure yield curve is flat into perpetuity from year 4 onwards. All bonds trading in the market have a face value of $100. This question (parts a - I) is worth 15 marks in total. For each part, if you enter the correct answer you will receive full marks (even if you don't show working). If you choose to show working, and get the answer incorrect, you may receive part marks. If you simply enter the incorrect answer and do not show working, you will not receive any part marks. a) What is the 1-year spot rate? (0.5 marks) Enter your answer to 4 decimal places eg if your answer is 6.54% enter as 0.0654. b) What is the 2-year spot rate? (2 marks) Enter your answer to 4 decimal places eg if your answer is 6.54% enter as 0.0654. c) What is the 3-year spot rate? (2 marks) Enter your answer to 4 decimal places eg if your answer is 6.54% enter as 0.0654. d) Explain why the 3-year coupon bond is trading at a premium to its par value. (1 mark) e) Price a 2 year zero-coupon bond off the pure yield curve? (1 mark) Enter your answer to 1 decimal place eg if your answer is 98.16 enter as 98.2. f) Price a 3-year 3% annual coupon bond off the pure yield curve? (1.5 marks) Enter your answer to 1 decimal place eg if your answer is 98.16 enter as 98.2. (g) With regard to the 4-year zero coupon bond, use the duration approximation to determine the approximate percentage change in its bond price if interest rates increase by 0.75%? h) According to expectations hypothesis, and based on the pure yield curve you have derived, what is the expected future interest rate between the end of year 2 and the end of year 3 E(2Y3)? (1 mark) Enter your answer to 4 decimal places eg if your answer is 6.54% enter as 0.0654. You observe the trading price of the following annual zero-coupon and coupon paying Government (risk-free) bonds: Maturity 1 2 3 4 Coupon 0% 6% 10% 0% Price $96.62 $99.56 $102.88 $62.53 You use these bond prices to derive the pure yield curve. Importantly, you have been told that the pure yield curve is flat into perpetuity from year 4 onwards. All bonds trading in the market have a face value of $100. This question (parts a - I) is worth 15 marks in total. For each part, if you enter the correct answer you will receive full marks (even if you don't show working). If you choose to show working, and get the answer incorrect, you may receive part marks. If you simply enter the incorrect answer and do not show working, you will not receive any part marks. a) What is the 1-year spot rate? (0.5 marks) Enter your answer to 4 decimal places eg if your answer is 6.54% enter as 0.0654. b) What is the 2-year spot rate? (2 marks) Enter your answer to 4 decimal places eg if your answer is 6.54% enter as 0.0654. c) What is the 3-year spot rate? (2 marks) Enter your answer to 4 decimal places eg if your answer is 6.54% enter as 0.0654. d) Explain why the 3-year coupon bond is trading at a premium to its par value. (1 mark) e) Price a 2 year zero-coupon bond off the pure yield curve? (1 mark) Enter your answer to 1 decimal place eg if your answer is 98.16 enter as 98.2. f) Price a 3-year 3% annual coupon bond off the pure yield curve? (1.5 marks) Enter your answer to 1 decimal place eg if your answer is 98.16 enter as 98.2. (g) With regard to the 4-year zero coupon bond, use the duration approximation to determine the approximate percentage change in its bond price if interest rates increase by 0.75%? h) According to expectations hypothesis, and based on the pure yield curve you have derived, what is the expected future interest rate between the end of year 2 and the end of year 3 E(2Y3)? (1 mark) Enter your answer to 4 decimal places eg if your answer is 6.54% enter as 0.0654.
Expert Answer:
Answer rating: 100% (QA)
a To calculate the 1year spot rate we can use the zerocoupon bond with a maturity of 1 year The formula to calculate the spot rate is Spot rate Face v... View the full answer
Related Book For
Income Tax Fundamentals 2013
ISBN: 9781285586618
31st Edition
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill
Posted Date:
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