Namibia’s Treasury Bills represent a significant proportion of most portfolios of financial institutions. On realizing this...

Namibia’s Treasury Bills represent a significant proportion of most portfolios of financial institutions. On realizing this fact, you have decided to analyse the yield curve for treasury bonds. The following table provides the necessary data:

Year to maturity	Par coupon yield to maturity (%)	Calculated spot rates (%)	Calculated forward rates (%)
1	6.00	6.00	6.00
2	7.2	7.21	7.42
3	8.00	?	?

a) Using the data in the table above, calculate the three-year spot rate and the three years forward rate, assuming annual compounding. [4]

Expert Solution

Assume, 1000 is the present value of future cash flows and annual cash flows are 70 each year.

Calculation of 3 years spot rate as follows,

1000 = 70/(1.06) + 70/(1.0721)^2 + 1070/(1+r)^3

1000 = 66.03773585 + 60.90142408 + 1070/(1+r)^3

873.06084007*(1+r)^3 = 1070

(1+r)^3 = 1.225573238

1+r = 1.0701

r = 7.01%------------spot rate

Calculation of 3 year forward rate as follows,

[(1+r)^3/(1.0721)^2] - 1 = [(1.0701)^3/(1.0721)^2] -1

= 1.0661 -1

= 6.61%-----------------forward rate

jeff jeffy answered 2 years ago

Question 3: As financial institutions are important in the development of country. Financial institutions serve most...

Question 3: As financial institutions are important in the development of country. Financial institutions serve most people in some way, as financial operations are a critical part of any economy, with individuals and companies relying on financial institutions for transactions and investing. Governments consider it imperative to oversee and regulate banks and financial institutions because they do play such an integral part of the economy. As a student of financial management can you write five points regarding role and responsibilities...

Significant Financial institutions are governed by the Basel Accords, as published by the Bank for International...

Significant Financial institutions are governed by the Basel Accords, as published by the Bank for International Settlements (BIS). Define the core elements of Basel II. What shortfalls were evident in this Capital Accord during the 2007-2009 Financial Crises? Define the core elements of Basel III, and how did these improve upon the prior Basel Accords,

How can financial institutions with stock portfolios use stock options when they expect stock prices to...

How can financial institutions with stock portfolios use stock options when they expect stock prices to rise substantially but do not yet have sufficient funds to purchase more stock? Explain how and why the option premiums may change in response to a surprise announcement that the Fed will increase interest rates even if stock prices are not affected? Assume you are looking at a call option on Bristol Cities Inc. with an exercise price of $104. Current stock price today...

a) what are financial markets. b) explain the following : i)treasury bills ii)debenture iii)certificate of deposit

6) Dodd Frank brought deep reforms to financial institutions. Name three significant changes to the law,...

6) Dodd Frank brought deep reforms to financial institutions. Name three significant changes to the law, and the nature and implications for each of these/

Describe the two most significant risks involved in international financial management.

Evaluate the actions of the U.S. Congress during the financial crisis. Two of the most significant...

Evaluate the actions of the U.S. Congress during the financial crisis. Two of the most significant pieces of legislation enacted by Congress were the Emergency Economic Stabilization Act of 2008 and the American Recovery and Reinvestment Act of 2009. Research the major provisions of these acts and explain the underlying economic theories. Did these acts have the expected result? Explain why or why not.

Identify five key processes that are considered the most significant financial issues that must be planned,...

Identify five key processes that are considered the most significant financial issues that must be planned, controlled, and managed for a plan to be successful.

Question