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Current (annualised) US Treasury spot rates are as follows: (Coupon : 4.2% frequency: Semi- annual) the date is 1 june 2017. PV of bond :

  1. Current (annualised) US Treasury spot rates are as follows: (Coupon : 4.2% frequency: Semi- annual) the date is 1 june 2017. PV of bond : 108.937 ; full price 109.227 ; Accrued interest = 0.9683 ;clean price = 108.258

6 months

1 year

18 months

2 year

0.4%

0.5%

0.6%

0.67%

Assuming that Z-spread is equal to 45 basis points, calculate the bonds arbitrage free price. Show calculations.

  1. If the bond is bought today at the arbitrage-free price and sold on 1 Jun 2018 at $103.5, what will be realised rate of return on bond, if no reinvestment of coupons is assumed. Show calculations. (3 marks)

  1. From the US treasury spot rates above and assuming Z-spread of 45 basis points, calculate appropriate discount rates (implied spot rates) for this bonds cash flows. Show calculations.
  2. Using bond-specific spot rates you calculated in Question 5, derive six-monthly forward rates, including six- months forward rate 6 month from now - 0.5f0.5, six-month forward rate 12 months from now - 1f0.5, and six-months forward rate 18 months from now - 1.5f0.5 for the bond. Show calculations.
  3. Estimate the bonds arbitrage free price using forward rates calculated in question 6 and comment on comparability of spot rate and forward rate pricing. Show calculations.
  4. There is another Microsoft Corp 2.5 year semi-annual 2% coupon paying bond in the market priced at $101.50. Using bond-specific spot rates as calculated in Question 5 (for 0.5 year, 1 year, 1.5 year and 2 years), bootstrap 2.5-year spot rate for the bond. Show calculations.

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