Question
Assume 6-month zero rate is 5% per annum with continuous compounding. Use the following table to answer the questions below. Following table gives the prices
Assume 6-month zero rate is 5% per annum with continuous compounding. Use the following table to answer the questions below.
Following table gives the prices of bonds:
| Face value | Time to maturity | Coupon / year | bond price |
| 100 | 1 year | 0 | 94 |
| 100 | 1.5 year | 20 | 115 |
*Half of the stated coupon is paid every six months
**All rates are continuously compounded
1) What is the zero rate for 1year?
2) What is the zero rate for 1.5year?
3) What is the par yield for the above bond that matures in 1.5 year?
| #1) zero rate for 1year = 5.55% | ||
| #1) zero rate for 1year = 5.78% | ||
| #1) zero rate for 1year = 6.19% | ||
| #1) zero rate for 1year = 6.24% | ||
| #2) zero rate for 1.5year = 7.88% | ||
| #2) zero rate for 1.5year = 8.28% | ||
| #2) zero rate for 1.5year = 9.18% | ||
| #2) zero rate for 1.5year = 9.48% | ||
| #3) par yield for 1.5yr bond = 9.23% | ||
| #3) par yield for 1.5yr bond = 8.89% | ||
| #3) par yield for 1.5yr bond = 10.03% | ||
| #3) par yield for 1.5yr bond = 11.69% |
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