Question

The following annual forward rates are available in the market today: F0,1 = 0.80%, F1,2 = 1.12%, F2,3 = 3.94%, F3,4 = 3.28% and F4,5 = 3.14%. The 3-year implied spot rate is closest to:

		a. 1.18%.
		b. 1.94%.
		c. 2.28%.
		d. 3.48%.
		e. 3.65%.

The following annual forward rates are available in the market today: F0,1 = 0.80%, F1,2 = 1.12%, F2,3 = 3.94%, F3,4 = 3.28% and F4,5 = 3.14%. The 2-year implied spot rate is closest to:

		a. 0.96%.
		b. 1.04%.
		c. 1.92%.
		d. 3.48%.
		e. 3.65%.

A bond with 5 years remaining until maturity is currently trading for 101 per 100 of par value. The bond offers a 6% coupon rate with interest paid semiannually. The bond is first callable in 3 years for a call price of $102, and is callable after that at end of year 4 for a call price of $101. The bond’s annual yield-to-first-call is closest to:

		a. 3.12%.
		b. 6.11%.
		c. 2.51%
		d. 2.91%
		e. 6.25%.

A 3-year floating-rate note pays 6-month Libor plus 140 bps. The floater is priced at 97 per 100 of par value. Current 6-month Libor is 1.00%. Assume a 30/360 day-count convention and evenly spaced periods. The discount margin for the floater in basis points is closest to:

		a. 218 bps.
		b. 246 bps.
		c. 342 bps.
		d. 180 bps.
		e. 239 bps.

Answer 1

The spot rate at 3rd year is as follows:

3.28%3-3.94%2

9.84%-7.88%

1.96%

Hence option (b) is correct.

b)

The spot rate at 2nd year is as follows:

3.94%2-1.12%

7.88%-1.12%

6.76% approx 3.65%

Hence option (c) is correct.

c)

[interest+(callable value - current price)/No of days]/ (callable value+current price)/2

[6%+(102-101)/3](102+101)/2

6.24%

Hence, (e) is correct option

d)

PV = 97

FV =100

PMT =(1%+0.140%)(180/360)100 = 0.57

(1.140)97%4

442 bps - 100 bps

342 bps

Hence, option (C) is correct.