Suppose the following bonds are traded in the market on the 15th of July 2015: 1

Question

Suppose the following bonds are traded in the market on the 15th of July 2015: 1-month zero coupon with $1000 face value currently trades at $996, 672 3-month zero coupon bond with $1000 face value currently trades at $989, 555 1-year 10% semi-annual coupon bond with $1000 face value currently trades at $1051.706 1-year 16% quarterly coupon bond with $1000 face value currently trades at $1110.628 ** 1-year 4% quarterly coupon bond with $1000 face value currently trades at $993, 938 ** x% semi-annual coupon means $1000 x%/2 coupon payments every 6 months x% quarterly coupon means $1000 x%/4 coupon payments every 3 months What are the continuously compounded 1-month, 3-month, 6-month, 9-month and 12-month spot rates? On the 15th of July 2015 you would like to lock in an interest rate to borrow on the 15th of August 2015 $1'000'000 for 8 months (until the 15th of April 2016). What is the continuously compounded forward rate you can lock in?

Explanation / Answer

1.a)

1.b)

So clearly you will go for 16%, one as can be seen.

Particulars Face value Trade value or market value Continous compounding at 10% Continous compounding at 16% Continous compounding at 4% Continous compounding at 10% amount of spot Continous compounding at 16% spot rate Continous compounding at 4% spot rate Monthly 1000 996.672 1.008374875 1.013433429 1.00334157 1008.374875 1013.433429 1003.341571 3-month 1000 989.555 1.025315121 1.040810774 1.01005017 1025.315121 1040.810774 1010.050167 6-month 1000 1051.706 1.051271096 1.083287068 1.02020134 1051.271096 1083.287068 1020.20134 9-month 1000 1110.628 1.077884151 1.127496852 1.03045453 1077.884151 1127.496852 1030.454534 12-month 1000 1000(assumed) 1.105170918 1.173510871 1.04081077 1105.170918 1173.510871 1040.810774

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.