Question
Kindly note the following: All interest rates are annual interest rates with semi-annual compounding. All coupon rates are annual rates paid semi-annually. All bonds have
Kindly note the following: All interest rates are annual interest rates with semi-annual compounding. All coupon rates are annual rates paid semi-annually. All bonds have $100 face values. Keep at least 6 decimal digits.
A risk-free 1-year 6% coupon bond has YTM=9% while a risk-free 1-year 16% coupon bond has YTM=9.1%. It is important to keep at least 7 decimal digits for all calculations!
a) Find the bonds prices.
b) Find 1-year spot rate c) Find 6-month spot rate
d) Consider a 1-year bond that currently sells at par. Assuming interest rates are not random, do you think this bond will be selling at a discount, premium, or at par 6 months from now? No calculations are required, but, if you cannot answer this question without calculations, you can find the coupon rate for this bond and compute its price 6 month from now.
e) Find the price of a 1-year 10% coupon bond
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