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the rate of 7% per year. Its yield to maturity is 4.4805% p.a., semi-annual compounding. What are the spot interest rates for the terms of 1 year and 2 years?

the rate of 7% per year. Its yield to maturity is 4.4805% p.a., semi-annual compounding. What are the spot interest rates for the terms of 1 year and 2 years?

Essentials Of Investments
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
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The table below illustrates the term structure of spot interest rates expressed in percentage per annum, with semi-annual compounding. | Term (years) | Rate (% p.a., semi-annual compounding) | |--------------|---------------------------------------| | 0.50 | 3.30% | | 1.00 | | | 1.50 | 3.92% | | 2.00 | | | 2.50 | 4.35% | | 3.00 | 4.52% | **Problem Statement:** Consider two bonds – Bond A and Bond B: - **Bond A:** Matures in 1.5 years with a semi-annual coupon rate of 10% per annum. The yield to maturity is 3.9050% p.a. with semi-annual compounding. - **Bond B:** Matures in 3 years with a semi-annual coupon rate of 7% per annum. The yield to maturity is 4.4805% p.a. with semi-annual compounding. **Question:** Determine the spot interest rates for terms of 1 year and 2 years.
Transcribed Image Text:The table below illustrates the term structure of spot interest rates expressed in percentage per annum, with semi-annual compounding. | Term (years) | Rate (% p.a., semi-annual compounding) | |--------------|---------------------------------------| | 0.50 | 3.30% | | 1.00 | | | 1.50 | 3.92% | | 2.00 | | | 2.50 | 4.35% | | 3.00 | 4.52% | **Problem Statement:** Consider two bonds – Bond A and Bond B: - **Bond A:** Matures in 1.5 years with a semi-annual coupon rate of 10% per annum. The yield to maturity is 3.9050% p.a. with semi-annual compounding. - **Bond B:** Matures in 3 years with a semi-annual coupon rate of 7% per annum. The yield to maturity is 4.4805% p.a. with semi-annual compounding. **Question:** Determine the spot interest rates for terms of 1 year and 2 years.
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