2. You are holding a 3-year bond with coupon rate 10%. Coupon payments are annual and par values are 100. Spot rates are: ri 5%, r2 = 6%, r3 = 6.5%. = (a) Determine as many forward rates as you can based on the spot rates above. (b) You would like to get a guaranteed 3-year return on your coupon bond. Explain how this can be achieved using forward rates. Which forward rates should you use? What is your guaranteed 3-year return?
2. You are holding a 3-year bond with coupon rate 10%. Coupon payments are annual and par values are 100. Spot rates are: ri 5%, r2 = 6%, r3 = 6.5%. = (a) Determine as many forward rates as you can based on the spot rates above. (b) You would like to get a guaranteed 3-year return on your coupon bond. Explain how this can be achieved using forward rates. Which forward rates should you use? What is your guaranteed 3-year return?
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Transcribed Image Text:2. You are holding a 3-year bond with coupon rate 10%. Coupon payments are annual
and par values are 100. Spot rates are: r₁ = 5%, r₂ 6%, r3 = 6.5%.
(a) Determine as many forward rates as you can based on the spot rates above.
(b) You would like to get a guaranteed 3-year return on your coupon bond. Explain
how this can be achieved using forward rates. Which forward rates should you
use? What is your guaranteed 3-year return?
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