QUESTION ONE

1. a) Determine the rate on the 6-month to 12-month Forward Rate Agreement (FRA(6x12m) contract) if the 6-month and 12-month US interest rates are 2% per annum (p.a.) and 4% p.a., respectively. Assume yearly compounding for all interest rates.

   (10 marks)

2. b) Suppose that the Duration of Assets (DA) is 5 years and the duration of liabilities (DL) is 3 years. The current market value of assets is 100 million pounds and the market value of liabilities is 80 million pounds. What would be the effect (loss or gain) on the market value of equity (dE) if interest rates increase from 5% p.a. to 7% p.a. ?

   (20 marks)

3. c) Calculate the Present Value of a zero-coupon bond with nominal value 1 million pounds and yield to maturity 6% pa and time to maturity equal to 10 years. Find the duration of the zero-coupon bond. (20 marks)