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Question 3 - Consider a bond that has a life of 18 months and pays a coupon of 6% per annum (with semi-annual payments); the

Question 3 - Consider a bond that has a life of 18 months and pays a coupon of 6% per annum (with semi-annual payments); the yield is 7.4% per annum continuously compounded.

(a) What is the bonds price?

(b) Suppose that the 6-month and 1-year zero rates are 4.5% and 5% per annum respectively. What is the 18-month zero rate? All rates are quoted with continuous compounding.

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