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1. Suppose that 6-month, 12-month, 18-month zero rates are, respectively, 4%, 4.2%, 4.4% per annum, with...

1. Suppose that 6-month, 12-month, 18-month zero rates are, respectively, 4%, 4.2%, 4.4% per annum, with continuous compounding. Estimate the cash price of a bond with a face value of 100 that will mature in 18 months and pays a coupon of 2.00 semiannually.

Hint: the value of a bond should be the sum of the present value of each cash flow. This bond has the following cash flow: $2.00 at 6 month, $2.00 at 12 month, and $102 at 18 month. Please use the corresponding zero rates to be the discount rate for each cash flow.

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Answer #1

Cash price of bond= $99.363489 Calculated as follows:

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