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Given the following information about interest rates, which of the following solutions is correct? Note that the coupon bond pays coupon twice per year. Par

Given the following information about interest rates, which of the following solutions is correct? Note that the coupon bond pays coupon twice per year.

Par (Face Value)

Maturity, years

Coupon, % per annum

Price

Discount factor

Interest rate, r

100

0.5

0

97

0.9700

6.0918%

100

1

0

93.75

0.9375

6.4539%

100

1.5

6

98

d

r

a.

Coupon = $3; d = {98 (3 * 0.9700 + 3 * 0.9375)} / 100 = 0.9228; r = -1/1.5 * ln(0.9228) = 5.3580%

b.

Coupon = $3; d = {98 (3 * 0.9700 + 3 * 0.9375)} / 103 = 0.8959; r = -1/1.5 * ln(0.8959) = 7.3286%

c.

Coupon = $6; d = {98 (6 * 0.9700 + 6 * 0.9375)} / 100 = 0.8655; r = -1/1.5 * ln(0.8655) = 9.6260%

d.

Coupon = $6; d = {98 (6 * 0.9700 + 6 * 0.9375)} / 106 = 0.8166; r = -1/1.5 * ln(0.8166) = 13.5106%

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