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Question 7[7+1+4=12 marks ] A firm called Swalot issues three types of coupon-paying bonds to investors. The three bonds all pay annual coupons in arrears
Question 7[7+1+4=12 marks ] A firm called Swalot issues three types of coupon-paying bonds to investors. The three bonds all pay annual coupons in arrears and are redeemable at par values. The terms to maturity of these three bonds are 1-year, 2-year and 3-year, respectively. The coupon rate is 6% per annum for the 1-year and 2-year bonds. The gross redemption yield of the 1-year and 2-year bonds are 3.5\% per and 4.5% per annum effective, respectively. The running yield of the 3 -year bond is 5.6% per annum, where this 3 -year bond is selling at par. a) Calculate the 1-year, 2-year and 3-year effective spot rate per annum, respectively. b) Calculate the effective forward rates per annum applied to the third year. c) Describe the yield curve trend based on the spot rates (from a)) versus term-to-maturity. Discuss the possible driver(s) of this outcome. Question 7[7+1+4=12 marks ] A firm called Swalot issues three types of coupon-paying bonds to investors. The three bonds all pay annual coupons in arrears and are redeemable at par values. The terms to maturity of these three bonds are 1-year, 2-year and 3-year, respectively. The coupon rate is 6% per annum for the 1-year and 2-year bonds. The gross redemption yield of the 1-year and 2-year bonds are 3.5\% per and 4.5% per annum effective, respectively. The running yield of the 3 -year bond is 5.6% per annum, where this 3 -year bond is selling at par. a) Calculate the 1-year, 2-year and 3-year effective spot rate per annum, respectively. b) Calculate the effective forward rates per annum applied to the third year. c) Describe the yield curve trend based on the spot rates (from a)) versus term-to-maturity. Discuss the possible driver(s) of this outcome
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