Question 20

Given a 6-month spot rate of 7.6% and a 1-year spot rate of 8.12%.

Calculate the implied 6-month rate six months from now. (Enter a percentage number, Round to 2 decimal places)

Question 21

Further, you have strong reasons to believe that the 6-month spot rate in six months will be 9%.

Describe the transactions can you undertake to profit from your information? Assuming that you can take out a loan of 100$ to invest.

Take out a 1-year loan at 8.12% and then invest in 6-month spot rate at 7.6% then reinvest again after 6 month at 9%",

"Take out a 6-month loan at 7.6% then refinance after 6 months at 9%.

The proceed will be invested at the 1-year spot rate at 8.12%",

"None is correct"

Question 22

How much profit will you expect to make if you use your whole line of credit? (4)

Hint: Calculate the payoff from your investment and the payment on your loan at the end of the year, then take the different. (Round to 2 decimal places)