Question 1 (13 marks) A six-month zero coupon bond with face value $100 sells for $99.46, a one-year zero coupon bond sells for $97.23, and an 18-month zero coupon bond sells for $90.50. Suppose a new coupon-paying bond, making semi-annual coupon payments, is issued today with face value $100, maturity of 18 months, and a semi-annual coupon payment of 9% (APR). (a) Calculate the no-arbitrage price of the coupon paying bond today. (8 marks) (b) Calculate the implied forward rates in this economy. (5 marks) Question 2 (10 marks) Suppose that a bond is purchased between coupon periods. The days between the settlement date and the next coupon period is 115. There are 183 days in the coupon period. Suppose that the bond purchased has a coupon rate of 7.4% and there are 10 semiannual coupon payments remaining. a) What is the dirty price for this bond if a 5.6% discount rate is used? (5 marks) b) What is the accrued interest for this bond? (2 marks) c) What is the clean price? (3 marks) Question 3 (13 marks) (Note: Keep your answer as concise as possible. a) How does the Liquidity Premium Theory of the term structure of interest rates differ from the pure expectations theory? (8 marks) b) Use the Liquidity Premium Theory to explain the following statement: Although expecting increases in future interest rates could result in an upward-sloping yield curve, an upward-sloping yield curve does not necessarily imply the expectation of higher future interest rates." (5 marks) Question 4 (14 marks) (Note: Keep your answer as concise as possible.] a) The Fed is the most independent of all U.S. government agencies. What is the main difference between it and other government agencies that explains the Fed's greater independence? (2 marks) b) What procedures can the Fed use to control the three-month Treasury bill rate? Why does the control of the interest rate imply that the Fed will lose control of the money supply? (6 marks) c) "Interest rates can be measured more accurately and more quickly than the money supply. Hence an interest rate is preferred over the money supply as an intermediate target." Do you agree or disagree? Explain your answer. (6 marks) End of Paner Question 1 (13 marks) A six-month zero coupon bond with face value $100 sells for $99.46, a one-year zero coupon bond sells for $97.23, and an 18-month zero coupon bond sells for $90.50. Suppose a new coupon-paying bond, making semi-annual coupon payments, is issued today with face value $100, maturity of 18 months, and a semi-annual coupon payment of 9% (APR). (a) Calculate the no-arbitrage price of the coupon paying bond today. (8 marks) (b) Calculate the implied forward rates in this economy. (5 marks) Question 2 (10 marks) Suppose that a bond is purchased between coupon periods. The days between the settlement date and the next coupon period is 115. There are 183 days in the coupon period. Suppose that the bond purchased has a coupon rate of 7.4% and there are 10 semiannual coupon payments remaining. a) What is the dirty price for this bond if a 5.6% discount rate is used? (5 marks) b) What is the accrued interest for this bond? (2 marks) c) What is the clean price? (3 marks) Question 3 (13 marks) (Note: Keep your answer as concise as possible. a) How does the Liquidity Premium Theory of the term structure of interest rates differ from the pure expectations theory? (8 marks) b) Use the Liquidity Premium Theory to explain the following statement: Although expecting increases in future interest rates could result in an upward-sloping yield curve, an upward-sloping yield curve does not necessarily imply the expectation of higher future interest rates." (5 marks) Question 4 (14 marks) (Note: Keep your answer as concise as possible.] a) The Fed is the most independent of all U.S. government agencies. What is the main difference between it and other government agencies that explains the Fed's greater independence? (2 marks) b) What procedures can the Fed use to control the three-month Treasury bill rate? Why does the control of the interest rate imply that the Fed will lose control of the money supply? (6 marks) c) "Interest rates can be measured more accurately and more quickly than the money supply. Hence an interest rate is preferred over the money supply as an intermediate target." Do you agree or disagree? Explain your answer. (6 marks) End of Paner
