Question
Question 1: a) Calculate the semi-annual and annual spot rates from the C-STRIP prices. Calculate the semi- annual forward rates from the semi-annual spot rates.
Question 1:
a) Calculate the semi-annual and annual spot rates from the C-STRIP prices. Calculate the semi- annual forward rates from the semi-annual spot rates. Show your work!
| Y ears | Semi-Annual Period | C-STRIP Price | Semi-annual Spot rate (z) | Semi- Annual Forward Rate (f) | Annual Spot (z x 2) |
| 0.5 | 1 | 98.0 | |||
| 1.0 | 2 | 95.5 | |||
| 1.5 | 3 | 93.0 | |||
| 2.0 | 4 | 90.5 | |||
| 2.5 | 5 | 88.0 | |||
| 3.0 | 6 | 85.0 |
b) The numbers listed below are investors actual expected future semi-annual interest rates. Compare the five forward rates you calculated to the expected future rates below. Do the numbers imply a negative or positive risk premium? Explain your answer.
| Semi-Annual Period | Expected Future Spot (z) Rate |
| 1 | |
| 2 | 3.10% |
| 3 | 3.25% |
| 4 | 3.60% |
| 5 | 4.10% |
| 6 | 4.10% |
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