In: Finance
You have the following information about the yield curve – Term 1 2 3 4 Rate 4% 4.50% 5% 5.50% What should be the price of a bond with a face value of $100 and an annual coupon of 5% that matures in 4 years. Show all calculations.
In the above question if the market price of the bond is $95, can you do arbitrage? Show how and your profit or loss. Show all calculations.
If the market price of the bond is $115, can you do arbitrage? Show how and your profit or loss. Show all calculations.
Estimate the 1-year forward rate 1 year from now. Show all calculations.
Estimate the 1-year forward rate 2 years from now. Show all calculations.
Estimate the 1-year forward rate 3 years from now. Show all calculations.
Please refer to below spreadsheet for calculation and answer. Cell reference also provided.
Cell reference -