Question

1. S1=2% F2=3% F3=4%. Calculate S2 and S3. Calculate discount factors. What is the FV3 of PV=$250?

2. Use a binomial tree to analyze a three-year coupon bond (face=$100, coupon = 3%) with 3% probability of default with S1=4%, F2=5%, F3=6%. What is the PV? What is the FV? What is the YTM? What is the discount factor incorporating the default risk?

3. Consider a world of uncertainty. An investment has payoff $100 (probability=20%), value $50 (probability=50%), value $10 (probability=30%). What is the expected value and the standard deviation?

4. The current interest rate is 5%. Rates move up (75%) or downs (25%) by one percentage point per year. What is the expected value of a 4-year zero coupon bond? What is the expected value with 3% probability of default? What is the expected present value with 3% probability of default and 60% recovery?

Answer 1

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