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Time-to-maturity
1 year
2 years
3 years
4 years
Face value
$100
$100
$100
$100
Coupon rate
0%
10%
20%
0%
Price
$95.24
$107.42
$140.51
$85.48
Time-to-maturity
2 years
2 years
Face value
$100
$100
Coupon rate
10%
20%
Price
$105.60
$123.86
1
ts
6) Suppose that the expectations hypothesis holds and that the current term
structure of interest rates is as follows:
y1 = 5%
y2 = 6%
y3 = 7%
a. What is the expected value of the two-year spot rate realizing at year
one, E(1 y3 )?
b. What is the expected price of a two-year zero-coupon bond with a face
value of $100 trading at year one?
7) You observe the following forward rates in the market:
0 f1 = 7%
1 f2 = 9%
2 f3 = 10%
What is the price of a 10% coupon bond with a face value of $100 and a
time-to-maturity of three years?
Essentials to cover:
Q1: calculate the term structure of interest rates up to year 2; Q2, Q3, Q6(a), Q7