Question

3. You have a zero coupon bond that pays $100 in two more years. Its price is $69.44. You also have a 5% coupon bond with a principal of $100. The spot rate for 1 year is 5%. (a) What is the spot rate for 2 years, ra? (b) What is the price of the coupon bond? (c) Make a graph to show the term structure of interest rates.

Answer 1

Answer to 3(a) - Zero coupon bond is the bond, of which face value is paid at the end of the maturity period.

Spot rate for two years is 20%. Calculation attached herewith

Answer to 3(b).

Price of the coupon bond is $95.24. Calculation attached herewith. This has been calculated assuming 1 year term. For two years terms @5% coupon bond price will be $90.70. (Formula of present value can be used in excel).

Books - Excel Bagri, Dhiraj 1 - 0 X Review View Help Tell me what you want to do Share Σ AutoSum - ΑΕ > Ο O 2 Copy AutoSave on 5.A.: File Home Insert Page Layout Formulas Data X Cut Calitri 11 AA === Paste Format Painter inter BIU. I A E Clipboard Font A1 X fix A B C D E Wrap Text General E Merge & Center - $ % De Fill - 0,0 Clear- Conditional Format as Cell Formatting Table - Styles - Styles Insert Delete Format - - - Colls Sort & Find & Filter - Select - Editing Alignment Number F G H I J K L M N O P Q R S T U V 2 Calculation to 3(a) Cumulative Price (Bond + 3 Year Bond Price Spot Rate Int Amount Interest Amount) 41 $ 6920% 5145 5 2 5 83 20% 5 175 100 83 B Calculation to 3(b) $100 5% 10 Coupon Bond Principal Value 11 Rate of interest of Bond 12 Year 13 Present Value of Bond = (Where star is no ot periods) Face Value of Bond / (1+Interest rate)" $95.24 $100 16 Coupon Bond Principal Value 17 Rate of Interest of Bond 18 Year 19 Present Value of Bond $90.70 20 22 Graph to 3(c) 24 Yield 25 Maturity = 26 1.0% Year 1 2.0% Year 2 2.9% Year 3 3.6% Year 4 4.3% Year 5 4.700% Year 6 Tarm Strbs flataractate Sheet1 Ready + 80% 20 e - e o xog # E E -- HM0 Seux 12:57 AM 10/30/2019 12

Answer to 3(c).

term structure of interest rates is the relationship between Interest rates or bond yields and maturity or different terms.

Books - Excel Bagri, Dhiraj 1 - 0 X Review View Help Tell me what you want to do Share Σ AutoSum - ΑΕ > Ο O 2 Copy Wrap Text Merge & Center - General $ % De Fill , AutoSave on @ 5.0.A.: File Home Insert Page Layout Formulas Data X Cut Calitri 11 AA === Paste Format Painter B IU.LI- A Clipboard Font A45 X fix A B C D E 21 22 Graph to 3(c) - 4.0.00 Conditional Format as Cell Formatting Table - Styles - Styles Clear- Insert Delete Format - - - Colls Sort & Find & Filter - Select - Editing Alignment Number F G H I J K L M N O P Q R S T U V 24 Yield 25 Maturity - 1.0% Year 1 2.0% Year 2 2.9% Year 3 3.6% Year 4 4.3% Year 5 4.700% Year 5 Term Structure of Interest rate 5.OX 4.5% 4.09 3.596 3.09 2.5% 2.UK Senes1 Series2 43 (in the above graph yield is increasing with decreasing trend over the terms of maturity) 41 45 46 Sheet1 Ready + 80% 120 d e e 9 w x 0 # E E -- HM0 Seu ( 4x 12:58 AM 10/30/2019 12