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MANG 6020 Financial Risk ManagementSeminar 2
Question 1
The six-month and one-year zero rates are both 10% per annum. For a bond that has a life of 18
months and pays a coupon of 8% per annum semiannually (with a coupon payment having just
been made), the yield is 10.4% per annum. What is the bond’s price? What is the 18-month zero
rate? All rates are quoted with semiannual compounding.
Question 2
The following table gives Treasury zero rates and cash flows on a Treasury bond:
Maturity (years) Zero rate Coupon payment Principal
0.5 2.0% $20
1.0 2.3% $20
1.5 2.7% $20
2.0 3.2% $20 $1000
Zero rates are continuously compounded
(a) What is the bond’s theoretical price?
(b) What is the bond’s yield?
Question 3
Suppose that zero interest rates with continuous compounding are as follows:
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