Q1

Consider an inverse floating rate coupon bond with 1 year remaining to maturity. On maturity, bondholders are expected to receive $100 face value. Coupons are paid quarterly and the current 3-mth LIBOR observed rate is 5.234% p.a. The annual coupon rate is specified as:

Annual coupon rate = 20% p.a. - 3C

where C is the annual 3-mth LIBOR rate. Assume, for simplicity, that the annual 3-mth LIBOR rate will never exceed 6.67% p.a. (so that the annual coupon rate defined above is always a positive number).

The following table shows the current LIBOR continuously compounded rate with different maturities:

Maturity	LIBOR	Maturity	LIBOR
1	5.0% p.a.	7	5.5% p.a.
2	5.1% p.a.	8	5.5% p.a.
3	5.2% p.a.	9	5.6% p.a.
4	5.3% p.a.	10	5.7% p.a.
5	5.3% p,a.	11	5.8% p.a.
6	5.4% p.a.	12	5.9% p.a

For example, the 1-mth LIBOR is 5.0% p.a. compounded continuously. You can treat the LIBOR rates presented in table above as the discount rates/spot rates with different maturities.

Required: What is the current price of the inverse floating rate coupon bond? Show workings.