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Q1. You observe the following price for 3 month SOFR futures: SYMBOL CONTRACT MONTH CURRENT SR3Z3 Dec-23 94.6475 SR3H4 Mar-24 94.665 SR3M4 Jun-24 94.84
Q1. You observe the following price for 3 month SOFR futures: SYMBOL CONTRACT MONTH CURRENT SR3Z3 Dec-23 94.6475 SR3H4 Mar-24 94.665 SR3M4 Jun-24 94.84 SR3U4 Sep-24 95.115 SR3Z4 Dec-24 95.4 Dec-23 contract implies a CURRENT overnight interest of (100-94.6475)/100 = 5.3525%. Each of the next four contracts (Mar, Jun, Sep and Dec-24) will be settled based on 90-day average overnight rate for the relevant future months, and can be thought of as representing three-month forward rates. Q1a. Calculate the implied forward rate for Mar, June, Sep, and Dec 24 respectively (5 points)? Q1b. What is implied Federal Fund rate cuts in 2024? If each cut is at 25 bps, how many cuts are priced in between now and end of the year (5 points) Q1c. Calculate 6-month and 12-month discount factors (5 points) Q1d. Find 6-month and 12-month spot rate? (5 points) (Note: spot rate is annualized) Q2. You observe the following yields for three PAR notes US Treasuries: 1Y yielding 5.05%, 2Y yielding 4.72%, and 3Y yielding 4.51%. Assume annual coupon payments. Q2a Find 1-year, 2-year and 3-year discount factors from the par bonds (5 points) Q2b Based on Q2a discount factors, which is the 1-year, 2-year, and 3-year forward rates? (5 points) Q2c Price a three-year 8% fixed rate coupon note using discount factors. Also find the note's yield to maturity (5 points). Q2d. You want to swap the 8% fixed rate note in Q2c into a floating rate note. In exchange for the fixed coupon, you will receive 1-year floating rate based on 1-year treasury rate PLUS a spread. What is the spread you will receive for the fixed to floating rate swap? (5 points)
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