Question 3. (This question has three parts: I, II andIII)

The following table gives the price of bonds:

Bond Principal

($)

Time To Maturity

(Years)

AnnualCouponRate

(%)

BondPrice

($)

100

0.5

0.0

97.56

100

1.00

0.0

94.26

100

1.50

8.0

100.00

Half the stated coupon is assumed to be paid every six months.

Part I.

Let the zero rates bean annualized rate in semi-annual compounding, calculate zero rates for maturities of 6 months, 12 months and 18 months.

(4 Marks)

Part II.

Calculate the price of a 1.5-years zero coupon bond based on the inferred zero rate in Part I.