Question
Let Z(t, T) denote the price at time t T of a ZCB with maturity T. Suppose the annually compounded rate during [t, T)
Let Z(t, T) denote the price at time t ≤ T of a ZCB with maturity T. Suppose the annually compounded rate during [t, T) is a constant rA. Show that
Z(t, T) = (1+ra)-(T-t). (1)
Using no-arbitrage argument.
Step by Step Solution
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Step: 1
Lets assume the face value of the ZCB to be 1 At time t enter into the ...
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An Introduction to the Mathematics of Financial Derivatives
Authors: Ali Hirsa, Salih N. Neftci
3rd edition
012384682X, 978-0123846822
