1. ABC bond pays a 6.5% coupon semi-annually and has 6 years remaining until maturity.

(a) What is the price if the yield to maturity is 5.5% and the bond price is calculated using semi-annual compounding?

(b) What is the price of the bond if the bond price is calculated using continuous compounding and a 5.5% yield?

2. (a) Using the Ken French daily data on the market risk premium Rm-Rf back to 1926 (posted in UBLearns), sort the returns and estimate the standard deviation.

(b) Using the history of sorted actual returns, find (i) the 1 day 95% VAR for the market risk premium and (ii) the 1 day 99.5% VAR for the market risk premium

(c) Find the 30 trading day 95% VAR and 99.5% VAR

(d) Using your estimate from part (a) for the std dev and assuming a mean of 0, what is the 30 day 95% VAR and 99.5% VAR using the normal distribution as the model for stock returns? (hint: for the 95%VAR use =norminv(.05,0,std dev) find the 1 day VAR)

3. You would like to enter a short position in the March 2014 E-mini S&P 500 Futures contract at the CME futures market. Find the initial margin and maintenance margin from the CME website and answer the following:

(a) How much cash is required to enter 10 short futures contracts?

(b) If the S&P 500 goes down to 1600, what is your profit?

(c ) After you purchase your position, assume the next 10 days closing prices for the S&P are 1750, 1800, 1770, 1700, 1680, 1640, 1610, 1660, 1630, 1690. For each day, calculate the cash flow required each day to settle up on the 10 contracts. (Note: if you drop below the maintenance margin, you will have to add cash to bring your balance back to the initial margin).

(d) show that your result in (c) is the same as you would get if you held an equivalent position in forward contracts and closed the position after 10 days at a price of 1690.