Question

1. A 1-year floating-rate note pays three-month LIBOR plus 1%. The floater is priced at 98 per 100 of par value. Calculate the discount margin for the floater assuming that three-month LIBOR is constant at 2%. Assume the 30/360 day-count convention,

A. 1.2659%

B. 3.0637%

C. 3.0765%

2. The following are two statements About a callable bond:

Statement 1: "The borrower of the callable bond has the right to repurchase the bond at a specific price."

Statement 2: "A callable bond has lower interest rate risk compared to a similar option-free bond due to the existence of the embedded call option."

A. Both statements are correct.

B. Exactly one of the statement is correct.

C. None of the statements is correct.

3. Series of zero-coupon bond for a full range of maturities is:

A. The spot curve.

B. The par curve.

C. The forward curve.

Answer 1

You have asked three unrelated questions in a single post. I have addressed the first one. Please post the balance questions separately.

Q - 1

The interest payment for each three months period = (LIBOR + Margin) x 3 / 12 x Par value = (2% + 1%) x 3 / 12 x 100 = 0.75 per 100 par value

PV = -Price = -98; PMT = 0.75; FV = 100; Nper = number of three months period in 1 year maturity = 4

Hence, interest rate per period = RATE (Nper, PMT, PV, FV) = RATE (4, 0.75, -98, 100) =  0.012659

Hence, interest rate per annum =  0.012659 x 4 =  0.050637 = 5.0637%

Hence, discount margin =  5.0637% - 3 month LIBOR = 5.0637% - 2% = 3.0637%

Hence, the correct answer is option B. 3.0637%