Consider the following information to answer the next 3 questions:

Maturity Coupon* Par Price Spot Yield

0.5 0 100 95

1. 0% 100 91

1.5 7% 100 101

*The coupons are paid every six months but yields are annual.

1. Establish the term structure over 1.5 years using the above data.

2. Using the information in (15), establish the fair value of a 18 month stripped (zero) coupon bond with par=100. Assume continuous compounding throughout.

3. Using the information in (15), establish the forward rates: R_0.5,1. What is the cash-settlement value on a $10 million FRA for a 6 month loan starting in 6 months, if the 6-month LIBOR in six months is 7%.

4. Provide 2 reasons why corporations should hedge their exposures and 2 reasons they should not.