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Consider a fixed income security with 12 months remaining to maturity. Every half a year (including on maturity), the security holder will receive a variable
Consider a fixed income security with 12 months remaining to maturity. Every half a year (including on maturity), the security holder will receive a variable interest equals to the 6-mth LIBOR rate. In addition, 3 months before maturity (and only at 3 months before maturity), the security holder will pay a variable interest equals to the 3-mth LIBOR rate. The holder will receive the $100 face value on maturity. The following table shows the current LIBOR continuously compounded rate with different maturities: LIBOR LIBOR Maturity 1 Maturity 7 8 2 3 9 5.0% p.a. 5.1% p.a. 5.2% p.a. 5.3% p.a. 5.3% p,a. 5.4% p.a. 5.5% p.a. 5.5% p.a. 5.6% p.a. 5.7% p.a. 5.8% p.a. 5.9% p.a 4 10 5 11 6 12 For example, the 1-mth LIBOR is 5.0% p.a. compounded continuously. You can treat the LIBOR rates presented in table above as the discount rates/spot rates with different maturities. Required: What is the current price of the security above? Show all of your workings. Consider a fixed income security with 12 months remaining to maturity. Every half a year (including on maturity), the security holder will receive a variable interest equals to the 6-mth LIBOR rate. In addition, 3 months before maturity (and only at 3 months before maturity), the security holder will pay a variable interest equals to the 3-mth LIBOR rate. The holder will receive the $100 face value on maturity. The following table shows the current LIBOR continuously compounded rate with different maturities: LIBOR LIBOR Maturity 1 Maturity 7 8 2 3 9 5.0% p.a. 5.1% p.a. 5.2% p.a. 5.3% p.a. 5.3% p,a. 5.4% p.a. 5.5% p.a. 5.5% p.a. 5.6% p.a. 5.7% p.a. 5.8% p.a. 5.9% p.a 4 10 5 11 6 12 For example, the 1-mth LIBOR is 5.0% p.a. compounded continuously. You can treat the LIBOR rates presented in table above as the discount rates/spot rates with different maturities. Required: What is the current price of the security above? Show all of your workings
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