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

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.

Question 2 Please

Answer 1

As requested, question 2 is answered.

Risk free rate for 3 year is given as 10%.

Applicable interest rate (YTM) of the specified bonds are as follows:

Sl. no	Company	Risk free rate	Spread	YTM
(i)	Disney	10%	0.5%	10%+0.5%=10.5%
(ii)	Boeing	10%	1%	10%+1%= 11%
(iii)	InfoSoft	10%	2%	10%+2%=12%

Prices of 3-year bonds of Face Value $1,000 with 5% coupon annually are as follows, calculated using the PV function of Excel:

Sl. no	Company	Price of bond
(i)	Disney	$    864.42
(ii)	Boeing	$     853.38
(iii)	InfoSoft	$     831.87

Detailed computation as below: