1. You have a bond that pays a $3 coupon in 1 year and a $3 coupon in two years and a $3 coupon in three years. It matures in three years with principal repayment of $100 (paid at the same time as the final coupon). Suppose 1-year, 2-year, and 3-year zero coupon bond prices are 0.99, 0.97, and 0.92, respectively. Which is closest to the fair market price of the bond that you have?

$96.00

$98.00

$100.00

$102.00

$104.00

2. You would like would like to swap the uneven payments (note that the payments are $3 in year 1, $3 in year 2, and $103 in year 3) associated with the bond described in (1) for payments of equal amounts in 1 year, in 2 years, and in 3 years. Assuming you can find a swap counterparty who offers you a fair deal (and that interest rates are unchanged from those described in (1)), what is closest to the swap rate amounts will you receive in each year as a result of the swap?

$32.00

$34.00

$36.00

$38.00

$40.00

3. The price of a 1-year zero coupon bond is 0.97. The price of a 2-year zero coupon bond is 0.93. The price of a 3-year zero coupon bond is 0.85. The price of a 4-year zero coupon bond is 0.78. You are a borrower who anticipates needing to borrow $100,000 for one year at the end of year 3 and would like to guarantee the rate on your upcoming loan (i.e., after 3 years you will need a $100,000 loan which will last for one year). Which is closest to the interest rate you will be able to guarantee if there are no transactions costs and you get a fair deal in the interest rate forward market?

1%

2.5%

4%

5.5%

7%