Question

Bond	Period	Year	Coupon	Price	YTM	Spot	Forward
A	1	0.5	4.8	101.78	1.22%	1.22%	1.22%
B	2	1	5.4	102.25	3.10%	3.12%	5.05%
C	3	1.5	6.2	101.34	5.26%	5.35%	9.87%
D	4	2	8.1	106.4	4.71%	4.76%	3.01%

The table above reports the prices and coupons of four bonds, as well as some implied rates. The coupons are paid semiannually. The rates in the table are APR (Answers should also be APR.) Forward rates for a period start a period before and continue for this period only: for example, the missing forward rate in the second row is the forward rate between 6 months from now and 12 months from now, the 9.87% forward rate in the third row is the forward rate between 12 months from now and 18 months from now

Q7- Consider another bond (Bond F) with two-year maturity with the coupon rate of 6.5%. What is the price of Bond F? Assume that the current price of Bond F is $102.86. Should you buy Bond F or sell it short?

Answer 1

Using the formula:

Period	Cash Flow	Spot Rate	PVF = 1/(1+(SR/2))^period	Cash Flow x PVF
1	3.25	1.22%	0.9939	3.23
2	3.25	3.12%	0.9695	3.15
3	3.25	5.35%	0.9239	3.00
4	103.25	4.76%	0.9102	93.98
			Price of Bond	103.36

Since the current price of the bond is less than its intrinsic price calculated, the price of the bond is expected to increase going forward. Therefore, the investor should buy the Bond.