Question

Theory of Bord AS Ther eke Bund

Answer 1

Bond A: Par Value = $ 100, Coupon = 8%, Coupon Frequency: Annual, Maturity = 3 years,

Annual Coupon = 0.08 x 100 = $ 8

No-Arbitrage Price = Total Present Value of Annual Coupons (discounted at the spot rates and not yield to maturity) + Par Value discounted at spot rate

Spot Rate Curve: Year 1 = 5%, Year 2 = 8% and Year 3 = 11 %

No-Arbitrage Price = 8 / (1.05) + 8 / (1.08)^(2) + 8 / (1.11)^(3) + 100 / (1.11)^(3) = $ 93.4464 ~ $ 93.45

Bond B:

Par Value = $ 100, Coupon = 4%, Coupon Frequency: Annual, Maturity = 3 years,

Annual Coupon = 0.04 x 100 = $ 4

No-Arbitrage Price = Total Present Value of Annual Coupons (discounted at the spot rates and not yield to maturity) + Par Value discounted at spot rate

Spot Rate Curve: Year 1 = 5%, Year 2 = 8% and Year 3 = 11 %

No-Arbitrage Price = 4 / (1.05) + 4 / (1.08)^(2) + 4 / (1.11)^(3) + 100 / (1.11)^(3) = $ 83.2828 ~ $ 83.28