# solution

provide the answers rounded to the nearest ten-thousandth

(all explanations are needed)

1.Using the semi-annually compounded yield curve in the Appendix, answer the following questions:

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1)You plan to price the following security: (Assume that the face value is 100.)

3.5-year floating rate bond with 20 basis point spread with annual payments (Assume that the yield curve has not changed for the last 6 months.)

First, draw a timeline and note the future cash flows from the FRB above in terms of c(t) and FV where c(t) and FV are the coupon payment at time t and the face value, respectively.

Second, calculate the first coupon payment from the timeline above. Note that the coupon payments above will be made annually and the interest rates in the yield curve are semi- annually compounded rates.

Last, compute the price of the FRB.

2)Price the following securities: (Assume that the face value is 100.)

• 3-year zero coupon bond

• 2-year coupon bond paying 2% quarterly

• 2.25-year T-note paying 5% (semi-annual) coupon

Please donĂ˘â‚¬â„˘t forget to provide a brief explanation of how you got these prices.

3)The yield curve table in the Appendix is missing the values for the maturities of 4.5 and 5 years. Compute these missing values from the following data:

4.5-year T-note with 4% coupon priced at \$102.4544

5-year T-note with 5% coupon priced at \$107.1929

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