You are a fixed income analyst with ABC Bank. The six-month spot rate is 4% (BEY
ID: 2779582 • Letter: Y
Question
You are a fixed income analyst with ABC Bank. The six-month spot rate is 4% (BEY basis). Further, assume the following six-month forward rates (BEY basis) given in the table below. Assume semiannual compounding.
1 (six months from today)
a.Compute the theoretical value of a 3 year 8% coupon paying T-bond making semi annual coupon payments.
b.What is the yield to maturity of the coupon bond?
Period BEY1 (six months from today)
4.4% 2 (1 yr from today) 5% 3 (1.5 yr from today) 5.6% 4 (2 yr from today) 6% 5 (2.5 yr from today) 6.4%Explanation / Answer
C1=C2=C3=C4=C5=Coupon=100*8%/2=4
FV=100
Price=C1/(1+y1/2)^1+C2/(1+y2/2)^2+C3/(1+y3/2)^3+....(C5+FV)/(1+y5/2)^5
=4/1.02+4/1.022^2+4/1.025^3+4/1.028^4+4/1.03^5+104/1.032^6
=104.588
To calculate YTM
Price=C1/(1+y/2)^1+C2/(1+y/2)^2+C3/(1+y/2)^3+....(C5+FV)/(1+y/2)^6
104.588=C1/(1+y/2)^1+C2/(1+y/2)^2+C3/(1+y/2)^3+....(C5+FV)/(1+y/2)^6
So, 104.588=4/(1+y/2)^1+4/(1+y/2)^2+4/(1+y/2)^3+....104/(1+y/2)^6
hence, yield to maturity=6.2977%
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.