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Consider following term structure of Treasury bill Period 6-month Rate 1 1.50% 2 1.70% 3 2.11% 4 2.98% 5 3.71% 6 4.01% 7 4.82% 8

Consider following term structure of Treasury bill

Period

6-month Rate

1

1.50%

2

1.70%

3

2.11%

4

2.98%

5

3.71%

6

4.01%

7

4.82%

8

5.13%

9

5.45%

10

6.25%

  1. Suppose a semi-annual bond with 5 year maturity that has 13% as annual coupon rate. If you want to short futures contract with this bond at $1020, how much of a dollar profit would you realize if the maturity of this futures is after fourth coupon payment?

(hint: current price of bond = PV of all future remaining coupon payment and face value.)

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