Question
1. Consider the following Treasury securities. CF1, CF2, CF3 refer to cash-ows in years one, two, and three. Asset Price CF1 CF2 CF3 ___________________________________ 1
1. Consider the following Treasury securities. CF1, CF2, CF3 refer to cash-ows in years one,
two, and three.
Asset Price CF1 CF2 CF3
___________________________________
1 98.765 100
2 97.547 100
3 96.350 100
4 2134.148 400 400 1400
(a) What is the term structure of interest rates in the marketplace? Please use annual
compounding.
(b) Does an arbitrage opportunity exist? If so, please describe the strategy. If not, explain
why there is no riskless prot opportunity.
(c) What is the rate that you can lock in today on a loan with maturity one year that starts
at t = 1? In other words, what is the 1-year forward rate?
(d) What is the duration of asset 4?
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Financial Markets and Institutions
Authors: Jeff Madura
11th Edition
1133947875, 9781305143005, 1305143000, 978-1133947875
