Question
You are holding a 3-year bond with coupon rate 10%. Coupon payments are annual and par values are 100. Spot rates are: r1 = 5%,
You are holding a 3-year bond with coupon rate 10%. Coupon payments are annual and par values are 100.
Spot rates are:
r1 = 5%,
r2 = 6%,
r3 = 6.5%.
Required
(a) Determine the bond’s price and YTM.
(b) Determine as many forward rates as you can, based on the spot rates above.
(c) You would like to get a guaranteed 3-year return on your coupon bond. Explain how this can be achieved using forward rates. Which forward rates should you use? What is your guaranteed 3-year return?
Step by Step Solution
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a To determine the bonds price and yield to maturity YTM we can calculate the present value of the b...
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Investments
Authors: Zvi Bodie, Alex Kane, Alan Marcus, Lorne Switzer, Maureen Stapleton, Dana Boyko, Christine Panasian
9th Canadian Edition
1259271935, 9781259271939
