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Following table gives the prices of bonds: Face value Time to maturity Coupon / year bond price 100 1 year 0 94 100 1.5 year

Following table gives the prices of bonds:

Face value

Time to maturity

Coupon / year

bond price

100

1 year

0

94

100

1.5 year

20

115

*Half of the stated coupon is paid every six months

**All rates are continuously compounded

Assume 6-month zero rate is 5% per annum with continuous compounding.

1) What is the zero rate for 1year?

2) What is the zero rate for 1.5year?

3) What is the par yield for the above bond that matures in 1.5 year?

Answer options:

#1) zero rate for 1year = 5.55%

#1) zero rate for 1year = 5.78%

#1) zero rate for 1year = 6.19%

#1) zero rate for 1year = 6.24%

#2) zero rate for 1.5year = 7.88%

#2) zero rate for 1.5year = 8.28%

#2) zero rate for 1.5year = 9.18%

#2) zero rate for 1.5year = 9.48%

#3) par yield for 1.5yr bond = 8.89%

#3) par yield for 1.5yr bond = 9.23%

#3) par yield for 1.5yr bond = 10.03%

#3) par yield for 1.5yr bond = 11.69%

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