7 8 1 Consider two Treasury coupon bonds maturing in six months and one year, with...
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7 8 1 Consider two Treasury coupon bonds maturing in six months and one year, with (annualized) coupon rate 5- and 4-, respectively. The corresponding prices (percentages of face value and 32nds of a percentage point) are 101:16 and 100:10, respectively. Calculate the discount factors d and d, the spot rates y and y, and the forward rate f implied by the above prices. 1 2 1 2 Now, consider the STRIPS that make up the 4- bond and assume they are fairly priced (no arbitrage opportunities). Assume you buy the 4-coupon bond (M=$100,000) and you use it to create the two STRIPS with the government. You sell the STRIPS. Assume that you can record the sale at the forward price of the STRIPS for delivery immediately before the next coupon payment; while the purchase of the coupon bond is recorded at the spot price. Calculate the profit or loss that you would show as a result of the transaction. 7 8 1 Consider two Treasury coupon bonds maturing in six months and one year, with (annualized) coupon rate 5- and 4-, respectively. The corresponding prices (percentages of face value and 32nds of a percentage point) are 101:16 and 100:10, respectively. Calculate the discount factors d and d, the spot rates y and y, and the forward rate f implied by the above prices. 1 2 1 2 Now, consider the STRIPS that make up the 4- bond and assume they are fairly priced (no arbitrage opportunities). Assume you buy the 4-coupon bond (M=$100,000) and you use it to create the two STRIPS with the government. You sell the STRIPS. Assume that you can record the sale at the forward price of the STRIPS for delivery immediately before the next coupon payment; while the purchase of the coupon bond is recorded at the spot price. Calculate the profit or loss that you would show as a result of the transaction.
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Answer rating: 100% (QA)
Answer To calculate the discount factors d1 and d2 we can use the formula Price C1yd1 C1y2d2 F1y2d2 ... View the full answer
Related Book For
Accounting What the Numbers Mean
ISBN: 978-0073527062
9th Edition
Authors: David H. Marshall, Wayne W. McManus, Daniel F. Viele,
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