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Pop Quiz 2. Questions. 1.a)Provide a definition of YTM. 1.b)What is the YTM of 5-year gov’t zero coupon bond selling at 82-21?
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Questions 1.a)Provide a definition of YTM. 1.b)What is the YTM of 5-year gov’t zero coupon bond selling at 82-21? • 2.a)Consider the following discount bonds prices B(0,1) = 98.5, B(0,2)=92. a) What is the price of a two year bond with 7% coupon annually paid and face value 100? B.optional) What is the forward rate F(1,1)?
Answers 1.a) It’s the rate that makes the PV of the CF’s equal to the price. 1.b) 92+21/32=100/(1+YTM)^5 => YTM = =(100/(82+21/32))^(1/5)-1=3.8831% 2.a) B(0,1)*7 +B(0,2)*107 .985*7+.92*107= 105.335 2.optional)B(0,t) = (1+R(0,t))^-t => R(0,t)=B(0,t)^(-1/t) -1 R(0,1) = (.985)^(-1)-1=1.5228% R(0,2)= (.92)^(-1/2)-1=4.2573% (1+R(0,1)(1+F(1,1))=(1+R(0,2)^2 => F(1,1) = 1.042573^2/1.015 228 – 1= 7.0655%