1 answer

Suppose that 6-month, 12-month, 18-month, and 24-month zero rates are 3.8%, 4%, 4.3%, and 4.6% per...

Question:

Suppose that 6-month, 12-month, 18-month, and 24-month zero rates are 3.8%, 4%, 4.3%, and 4.6% per annum with continuous compounding respectively. Estimate the cash price of a bond with a face value of 100 that will mature in 24 months and pays a coupon of 10% per annum semiannually.


Answers

The cash flows from this bond are $10, $10, $10, and $110(100+10) at 6-month, 12-month, 18-month, and 24-month respectively.

Considering the zero rates are 3.8%, 4%, 4.3%, and 4.6% per annum, the value of the bond will be calculated as follows:

Bond value = Σ CF/(1+r/n)^n

= $10/(1+3.8%/2)^1+$10/(1+4%/2)^2+$10/(1+4.3%/2)^3+$110/(1+4.6%/2)^4

= $129.24

.

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