1. Youcurrently haveashortposition,agreeing tosellaUStreasury bond,inthefuturemarket. Thecontract matures today and you are considering buying two different bonds in the spot market to deliver (sell) to honor your contract. BondAhas6yearsand2months leftbeforeitmatures.Itmakessemiannualcouponpaymentsandhasa coupon rate of 8%, par value of 100, and a current price of 118.46 BondBhas7yearsand4months leftbeforeitmatures.Itmakes semiannualcouponpayments andhasa coupon rate of 9%, par value of 100, and a current price of 118.86. The current future price is 105.00.Which of the two bonds would be the cheapest bond to deliver in the futuresmarket(calculatetheconversionfactor ofboth,thendeterminewhichisthecheapesttodeliver). Value Bond at 6%YTM
2. You have recently entered into a forward rate agreement as the lender. The fixed rate in the FRA is 3.6% (RK = 3.6% annually or 1.8% semiannually). The FRA is for a 6 months starting one year from today (T1 is one year from today, T2 is 1.5 years from today). The notional principal of the FRA is $50 million a.Assume that one year from today the six-month LIBOR rate (RM) is 4% annually (2% semiannually). What is the net cash flow on the FRA, and as the lender do you receive or pay the cash flow? What is the effective rate the lender receives on its loan (the combined impact of lending at the spot rate of 4% and the payment from the FRA). b.Assume that at time 6 months (exactly one year before the end of the contract (T2) the forward LIBOR rate (RK) is 3.8%. If the one-year risk-free rate is 2.5%, what is the current value of the FRA to the lender?