Question

Suppose you would like to create a two-year synthetic zero-coupon bond. Assume the

following is true: One-year zero-coupon bonds are trading for $0.93 per dollar of face value

and two-year 7% coupon bonds (with annual payments) are selling at $983.30 (face =

$1,000).

a) What are the cash flows from the two-year coupon bond?

b) What is the one-year spot rate?

c) What must be the two-year spot rate?

d) Assume you can purchase the two-year coupon bond and unbundle the two cash flows

and sell them. What price would you receive for each cash flow?

Answer #1

you
wish to create a synthetic forward rate agreement in which you
would lock in a return between 150 and 310 days. the price of a
150-day zero coupon bond is 0.9823 and the price of 310 day zero
coupon bond is 0.9634. Which one of the following methods is the
correct method to create the synthetic FRA? explain
A) borrow one 150-day bond and invest in 1.02 of the 310-day
bonds.
B) borrow two 150-day bonds and invest in...

Suppose a one-year pure discount bond (zero-coupon bond) is
trading at £950, and a two-year pure discount bond is trading at
£905. Assuming no market frictions, if a twoyear coupon bond with
5-percent coupon rate is trading at £992, describe explicitly how
investors should trade to enjoy arbitrage profits. All bonds are
riskless and have a face value of £1000

A "zero coupon bond" (or just "zero") is a bond, that does not
pay any interest, it just pays the face value when it matures. Of
course nobody would purchase a bond without interest, that's why
zero coupon bonds are sold at a discount.
Suppose you are given the following information about the
current prices of zero coupon bonds:
bond:
price
1-year zero, face value $1,000
$909.09
2-year zero, face value $1,000
$826.45
3-year zero, face value $1,000
$718.65
I.e....

7. Consider a one-year coupon bond with face
value of $100 and coupon payment equal to $10 paid every 6 months.
The market interest rate on similar coupon
bonds is 12%.
SHOW ALL STEPS.
(a) Find the price of the
one-year coupon bond.
(b) Assume a one-year zero
coupon bond is priced at $93. Find the bond’s
yield to maturity.
(c) The current yield on 6
mo. bonds is 7%.
(d) Create a...

Suppose that the prices today of zero-coupon bonds with various
maturities are in the following table. The face value of every bond
is $1,000.
Maturity in years
Price
1
925.93
2
853.39
3
782.92
4
715.00
5
650.00
Calculate the one-year forward rate of interest for every
year.
Suppose that today you buy one 3-year maturity zero coupon bond.
How many 5-year maturity zeros would you have to sell to make
What are the cash flows from the strategy in...

You have the following information on three zero coupon
bonds:
Bond 1: time to maturity: 1 year, face value = $1,000, bond
price = $971.58;
Bond 2: time to maturity: 2 years, face value = $1,000, bond
price = $925.47;
Bond 3: time to maturity: 3 years, face value = $1,000, bond
price = $858.96.
Part A: Calculate the one, two and three year spot rates.
Part B: Calculate the forward rate over the second year and the
forward rate...

All rates are annual. The one-year zero coupon rate is 3%. The
two year zero-coupon rate is 4%. The price of a two-year 3% coupon
bond with the face value of $1,000 is $ …………[A}………… (accuracy to
one cent) and its yield to maturity is ………{B}………………. percent (enter
3.65% as 3.65 not 0.0365, accuracy at least to two decimals):
All rates are annual. The one-year zero coupon rate is 3%. The
two year zero-coupon rate is 4%. The price of...

The price of a 1-year zero coupon bond is 0.97. The price of a
2-year zero coupon bond is 0.93. The price of a 3-year zero coupon
bond is 0.85. The price of a 4-year zero coupon bond is 0.78. You
are a borrower who anticipates needing to borrow $100,000 for one
year at the end of year 3 and would like to guarantee the rate on
your upcoming loan (i.e., after 3 years you will need a $100,000
loan...

22. Consider a 2-year zero-coupon bond and a 2-year coupon bond
that both have a face value of $100. The coupon bond has a coupon
interest rate equal to 5%. Both bonds currently have the same yield
to maturity of 6%. Which statement is FALSE?
A) Both bonds are trading at a discount.
B) The zero-coupon bond is trading at a discount but the coupon
bond is trading at a premium.
C) The internal rate of return for both bonds...

4. Assume that you are holding two bonds. A 30-year zero coupon
bond, and 30-year coupon bond with 2% coupon. You are not planning
to hold the bonds till maturity. If you expect the interest rates
to decrease sharply, which bond would you rather get rid-off
(sell)? explain
5. Read this case carefully. “You relative asks you to lend him
money and promised to pay you 8% per year. You know that the bank
offers 5% return on a saving...

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