1.Given a term structure of interest rates, derive the spot rates projected for years 1, 2,...

1.Given a term structure of interest rates, derive the spot rates projected for years 1, 2, ….n,

T	T period Bond Yield to mat. (zero coupon)	Implied spot rates
1	6.0
2	6.7
3	7.0
4	7.5
5	7.6

Compute your spot rates.

Explain why it is important that we use zero coupon bonds.

2.Given an n year zero coupon bond, compute the modified duration.

3. Introduction to risk free pricing. Compute the risk free pricing of a call option entitling the owner to purchase one share of stock in corporation S for 52. Assume that the current price of stock S is 50 and that it has a 50-50 chance of either going to 57 or to 43.

Compute the proportions in a risk free portfolio.

Compute the future value of the portfolio when stock goes up and when stock goes down.

Assume the risk free rate of interest is zero, what the the current value of that portfolio?

What is the current value of the call option,.

Expert Solution

jeff jeffy answered 2 years ago

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