Exercise 3 (6 marks)

1. What are the 0.5-year and 1-year zero rates (continuously compounding) implied from the table below? Assume coupons are paid semi-annually for coupon bonds. (2 marks)

Bond Principal ($) Time to Maturity (yrs) Coupon per year ($) Bond price ($) 100 0.50 0 97.43 100 1.00 4 98.97 100 1.50 6 101.62 100 2.00 8 106.28

1. Suppose that the 6-month, 12-month, 18-month, and 24-month zero rates are 5.10%, 5.00%, 4.80% and 4.75%, respectively. What is the two-year par yield? Verify the solution is correct by showing the discounted cashflows at the par yield. Round all answers to 4 decimal places. (4 marks)