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Consider a 4-year leveraged inverse floating rate bond with the following coupon rate: c(t) = 24%-2.4*r(t-0.5). This coupon is paid semi-annually, in arrears. So, the
Consider a 4-year leveraged inverse floating rate bond with the following coupon rate: c(t) = 24%-2.4*r(t-0.5). This coupon is paid semi-annually, in arrears. So, the dollar coupon at each payment date is given by: $coupon = c(t) / 2 * 100. Assume it is Dec. 31, 1993 and use the average of the bid and ask discount factors given in the table below. What is the value of this inverse floater?
Table 2.7 Discount Factors Z(0,T) on December 31, 1993 Maturity Coupon Bid Ask ZB(0,T) ZA(0,T) 19940630 19941231 19950630 19951231 19960630 19961231 19970630 19971231 19980630 19981231 0.000 7.625 4.125 4.250 7.875 6.125 6.375 6.000 5.125 5.125 98.3911 103.8125 100.1875 100.0000 108.6875 104.5313 105.1563 103.7813 100.0625 99.6250 98.4012 103.8750 100.2500 100.0625 108.7500 104.5938 105.2188 103.8438 100.1250 99.6875 0.9839 0.9639 0.9423 0.9191 0.9014 0.8743 0.8466 0.8203 0.7944 0.7703 0.9840 0.9645 0.9429 0.9196 0.9019 0.8748 0.8471 0.8208 0.7950 0.7708 Table 2.7 Discount Factors Z(0,T) on December 31, 1993 Maturity Coupon Bid Ask ZB(0,T) ZA(0,T) 19940630 19941231 19950630 19951231 19960630 19961231 19970630 19971231 19980630 19981231 0.000 7.625 4.125 4.250 7.875 6.125 6.375 6.000 5.125 5.125 98.3911 103.8125 100.1875 100.0000 108.6875 104.5313 105.1563 103.7813 100.0625 99.6250 98.4012 103.8750 100.2500 100.0625 108.7500 104.5938 105.2188 103.8438 100.1250 99.6875 0.9839 0.9639 0.9423 0.9191 0.9014 0.8743 0.8466 0.8203 0.7944 0.7703 0.9840 0.9645 0.9429 0.9196 0.9019 0.8748 0.8471 0.8208 0.7950 0.7708Step by Step Solution
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