Question

1. Suppose that you know the risk free rates for different maturities: Year Interest rate (%) 1 r1 = 8% 2 r2 = 9% 3 r3 = 10% 4 r4 = 11% 5 r5 = 12%

a) Determine the discount factors for each maturity (the present value of $1 received in t)?

b) Determine the present value and the YTM (yield to maturity) for the following T-bonds (Face value = 1000 $): i) 2 year maturity and 4% coupon rate ii) 5 year maturity and 6% coupon rate iii) 5 year maturity and 10% coupon rate. Show how you found the present value and YTM

2) Using the risk free rates in question 1, determine the price of a 3 year bond issued by i) Disney (spread 0,5%), ii) Boeing (spread 1%) and iii) InfoSoft (spread 2%) taking into account that the face value is $1.000, the coupon rate for the three bonds is 5% annually, and coupons are distributed every year. Show how you computed the price.