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A 3-year bond carrying 3.4% annual coupon and $100-par is putable at par 1 year and...

A 3-year bond carrying 3.4% annual coupon and $100-par is putable at par 1 year and 2 years from today. Calculate the value of the putable bond under the forward rate curve below.

1-year spot rate: 2.1%;

1-year spot rate 1 year from now: 2.5%;

1-year spot rate 2 years from now: 3.8%.

Assume annual compounding. Round your answer to 2 decimal places (nearest cent).

Solutions

Expert Solution

Coupon Rate: 3.4%

Par value of bond : $100

1-year spot rate: 2.1%

1-year spot rate 1 year from now: 2.5%

1-year spot rate 2 years from now: 3.8%

1-year spot rate: 2.1%

PV0 = 0.034× $100 + $100/ 1+0.021 = 101.27

1-year spot rate 1 year from now: 2.5%

PV1 = 0.034× $100 + $100/ 1+0.025 = 98.80

1-year spot rate 2 years from now: 3.8%

PV2 = 0.034× $100 + $100/ 1+0.038  = 99.62

jeff jeffy answered 2 years ago
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