(a) What is the forward rate? What is the relationship between forward rates and the spot rates? Provide the equation assuming annually compounded rates over two years. I (b) In the market we observe the following term structure of continuously com- pounded spot rates: year to maturity spot rates 1 9.5% 2 8.3% 3 7.5% Compute the forward f(1,2) and f(2,3). [ 145
(a) What is the forward rate? What is the relationship between forward rates and the spot rates? Provide the equation assuming annually compounded rates over two years. I (b) In the market we observe the following term structure of continuously com- pounded spot rates: year to maturity spot rates 1 9.5% 2 8.3% 3 7.5% Compute the forward f(1,2) and f(2,3). [ 145
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
Can you help with A and b
![3. Answer all parts of this question.
(a) What is the forward rate? What is the relationship between forward rates and
the spot rates? Provide the equation assuming annually compounded rates
over two years.
ن -
(b) In the market we observe the following term structure of continuously com-
pounded spot rates:
year to maturity spot rates
1
9.5%
2
8.3%
3
7.5%
Compute the forward f(1,2) and f(2,3). [
(c) Compute the price and the duration of a bond of maturity 2 years and face
value 100 USD, which semi-annually pays a coupon of 4 USD, assuming the
yield to maturity is 5% continuously compounded. [‹
(d) Compute the price of the bond in (c) using the term structure of the interest
rates in point (b). Assume also i0.5 9.8% and i1.5 is obtained as simple
average between i₁ and i2. [
=]
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Transcribed Image Text:3. Answer all parts of this question.
(a) What is the forward rate? What is the relationship between forward rates and
the spot rates? Provide the equation assuming annually compounded rates
over two years.
ن -
(b) In the market we observe the following term structure of continuously com-
pounded spot rates:
year to maturity spot rates
1
9.5%
2
8.3%
3
7.5%
Compute the forward f(1,2) and f(2,3). [
(c) Compute the price and the duration of a bond of maturity 2 years and face
value 100 USD, which semi-annually pays a coupon of 4 USD, assuming the
yield to maturity is 5% continuously compounded. [‹
(d) Compute the price of the bond in (c) using the term structure of the interest
rates in point (b). Assume also i0.5 9.8% and i1.5 is obtained as simple
average between i₁ and i2. [
=]
-
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