1. Calculate zero-coupon yields for maturities of 0.5, 1, 1.5, and 2-years. 2. C
ID: 2816950 • Letter: 1
Question
1. Calculate zero-coupon yields for maturities of 0.5, 1, 1.5, and 2-years.
2. Calculate the discount factors that the zero-coupon yields imply. Do you see any
potential problems? Why?
3. Suppose that you have a technology that allows you to store money for free (a mattress") between years 1.5 and 2. That is, if you put $x under your mattress at t = 1.5,
you will still have $x at t = 2. Construct a long-short trading strategy using the four bonds that earn you free money today
FACE VALUE OF ALL BONDS ARE 100
Bond Coupon (%) Maturity (year) Price A 5 0.5 101.99 B 3 1 101.49 C 4 1.5 102.96 D 6 2 108.99Explanation / Answer
The above question is related to Debentures and Bonds. The Yield to Maturity formula is as below:-
Yield to Maturity =( C+F-P/M )/F+P/M
where C= Coupon Rate
F=Face Value
P= Current Price
M= maturity
A. zero coupon Yields for Maturities of 0.5,1,1.5 and 2 years. The above formula is used to calculate the yield to maturity:-
Answer
B. Yes i do see the potential problems i.e. The discount factor that the zero coupon yields imply from year 0.5 to 1 , it has reduced by 0.5. The calculation of discount factor is as below:-
Zero Coupon Yield = ( (F/PV) 1/n)-1
where F= Face Value , PV = Present Value and N= Number of Periods
Zero Coupon Bond is also called as Discount Bond.
Yield to Maturity for 0.5 Years= (0.05+(100-101.99/0.5)/100+101.99/0.5) Yield to Maturity for 1 years= (0.03+(100-101.49/1)/100+101.49/1) Yield to Maturity for 1.5 Years=(0.04+(100-102.96/1.5)100+102.96/1.5) Yield to Maturity for 2 years=(0.06+(100+108.99/2)100+108.99/2)Related Questions
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