The term structure shows the following Treasury spot rates: Maturity in years 1 2 3 4...

The term structure shows the following Treasury spot rates: Maturity in years 1 2 3 4 5 Spot Rate in % 0.6 1.1 1.6 1.9 2.6 Attempt 1/10 for 10 pts. Part 1 What is the implied 1-year forward rate one year from now? 4+ decimals Attempt 1/10 for 10 pts. Part 2 What is the implied 1-year forward rate two years from now? 4+ decimals Attempt 1/10 for 10 pts. Part 3 What is the implied 1-year forward rate three years from now? 4+ decimals Attempt 1/10 for 10 pts. Part 4 What is the implied 1-year forward rate four years from now? 3+ decimals

Expert Solution

jeff jeffy answered 1 year ago

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...

In January 2020, the term-structure of spot rates is as follows (with continuous compounding): Maturity (years)...

In January 2020, the term-structure of spot rates is as follows (with continuous compounding): Maturity (years) Zero-rate(%) 1 2.0 2 3.0 3 4.0 A 3-year zero-coupon bond has the face value of $1,000. Consider a 1-year forward contract on the zero coupon bond. What should be the forward price? (a) $904.84 (b) $923.12 (c) $941.77 (d) $960.79

The current term-structure of spot rates is as follows (with continuous compounding): Maturity (years) Zero-rate(%) 1...

The current term-structure of spot rates is as follows (with continuous compounding): Maturity (years) Zero-rate(%) 1 3.0 2 4.5 3 5.5 What is the implied forward rate r0(2, 3)? (a) 6.00% (b) 6.75% (c) 7.50% (d) 7.53% A bank offers a special bond A through which investors can borrow (lend) $100 in year 2 and repay (receive) $100×e 0.07 in year 3. Is there an arbitrage? If so, what is the arbitrage’s net cash flow in year 0? (Consider an...

Treasury is: Spot 1-year Treasury is 4% Spot 2-year treasury is 4.5% B Corporate Debt interest...

Treasury is: Spot 1-year Treasury is 4% Spot 2-year treasury is 4.5% B Corporate Debt interest annually Spot 1 year 8.5%, Spot 2 years 9.5% Forward 1 Year maturity Let’s call the Treasury x The Corporate debt is called y What is the value of x the forward rate on one-year maturity Treasuries delivered in one year? What is the value of y the forward rate on one-year maturity B corporate debt delivered in one year? Exercising the term structure...

Treasury spot rates (expressed as semiannually pay yields to maturity) are as follows: 6 months 1%,...

Treasury spot rates (expressed as semiannually pay yields to maturity) are as follows: 6 months 1%, 1 year 1.5%, 1.5 year 2% 2 year: 2.5% and 2.5 year: 2.25%. A 2.5 year, 3.5% Treasury bond is trading at $1,043. What is the arbitrage trade and how much would profit would you earn from doing the trade?

Suppose the term structure of risk-free interest rates is as shown below: Term (years) 1 2...

Suppose the term structure of risk-free interest rates is as shown below: Term (years) 1 2 3 4 5 Rate 1.99% 2.32% 2.74% 3.03% 3.43% a. Calculate the present value of an investment that pays $1000 in two years and $2000 in five years for certain. Answer: the present value is $. (round to two decimals) b. Calculate the present value of an investment that pays $100 at the end of each of year from 1 to 5 for certain....

You observe the following term structure of interest rates (zero-coupon yields, also called "spot rates"). The...

You observe the following term structure of interest rates (zero-coupon yields, also called "spot rates"). The spot rates are annual rates that are semi-annually compounded. Time to Maturity Spot Rate 0.5 2.00% 1.0 3.00% 1.5 3.50% 2.0 3.00% 2.5 4.00% 3.0 4.50% Compute the six-month forward curve, i.e. compute f(0,0.5,1.0), f(0,1.0,1.5), f(0,1.5,2.0), f(0,2.0,2.5), and f(0,2.5,3.0). Round to six digits after the decimal. Enter percentages in decimal form, i.e. enter 2.1234% as 0.021234. In all the following questions, enter percentages in...

Suppose the term structure of risk-free interest rates is shown below. Term 1 year 2 years...

Suppose the term structure of risk-free interest rates is shown below. Term 1 year 2 years 3 years 5 years 7 years 10 years 20 years Rate (EAR, %) 1.99 2.41 2.74 3.32 3.76 4.13 4.93 What is the present value of an investment that pays $100 at the end of each of years 1, 2, and 3? If you wanted to value this investment correctly using the annuity formula, which discount rate should you use? The present value of...

The term structure of interest rates: A. graphs the level of coupons by maturity and is...

The term structure of interest rates: A. graphs the level of coupons by maturity and is also called a yield curve B. graphs the coupon rate, current yield, and yield to maturity of a bond C. graphs the level of corporate bond rates based on default risk premiums and maturity D. graphs the level of interest rates by maturity and is usually upward sloping

Given the following table of spot and coupon rates for Treasury Securities. Calculate the theoretical spot...

Given the following table of spot and coupon rates for Treasury Securities. Calculate the theoretical spot rate for the 2 years Treasury Period Years Yearly Spot Rate Yearly Coupon Rate 1 0.5 4.50% 4.50% 2 1 4.75% 4.75% 3 1.5 5% 4 2 5.25%

Question