1) When compounded annually an interest rate is 11%. What is the rate when expressed with (a) semiannual compounding, (b) quarterly compounding, (c) monthly compounding, (d) weekly compounding, and (e) daily compounding.

2) The table below gives Treasury zero rates and cash flows on a Treasury bond. Zero rates are continuously compounded. (a) What is the bonds theoretical price? (b) What is the bonds yield? Maturity (years) Zero rate Coupon payment Principal 0.5 2.0% $20 1.0 2.3% $20 1.5 2.7% $20 2.0 3.2% $20 $1,000

3) A 5-year bond provides a coupon of 5% per annum payable semiannually. Its price is 104. What is the bonds yield? You may find Excels Solver useful.

4) Suppose that LIBOR rates for maturities of 1, 2, 3, 4, 5, and 6 months are 2.6%, 2.9%, 3.1%, 3.2%, 3.25%, and 3.3% with continuous compounding. What are the forward rates for future 1-month periods?

5) A bank can borrow or lend at LIBOR. The 2-month LIBOR rate is 0.28% per annum with continuous compounding. Assuming that interest rates cannot be negative, what is the arbitrage opportunity if the 3-month LIBOR rate is 0.1% per year with continuous compounding. How low can the 3-month LIBOR rate become without an arbitrage opportunity being created?