Question

2. Long answer questions (25 points) d the answer to two decimal points. e.g., 0.45%. ote: write down th e necessary steps; roun (1) The following table gives the prices of bo Bond Prinepat(Sime to Maarity Annual Coupon (3)" Bond Price (5 yrs) 0.5 1.0 1.5 98 95 102 100 0.0 0.0 6.2 100 100 Half the stated coupon is paid every six months a) (7 points) Calculate zero rates (with continuous compounding) for maturities of 6 mor 12 months and 18 months. b) (8 points) What are the forward rates (with continuous compounding) for the periods: 6 months to 12 months? 12 months to 18 months?

Answer 1

Time to maturity 6 months a) 98exp(r*0.5) 100 (In(100/98)V.5 4.04% (LM100/98))/0.5 Time to maturity 12 months 95exp(r1) 100 (In(100/95)/1 5.13% Time to maturity 18 months Final value 100 + 3.1exp(*1)+3.1explr#0.5) So, 100exp(*1.5)-100 + 3.1explr*1)+3.1explr#0.5) 4.13% exp(0.5*4.04%)"exp(f*0.5)-exp(5.13%) (5.13%-0.5*4.04%)0.5 6.22% exp(1*5.13%)"exp(f*0.5)-exp(4.13%* 1.5) (4.13%* 1.5-5.13%)/0.5 2.13%