4.34. The following table gives the prices of bonds: Bond principal ($) | Time to maturity (years) | Annual coupon* ($) | Bond price ($) ---|---|---|--- 100 | 0.50 | 0.0 | 98 100 | 1.00 | 0.0 | 95 100 | 1.50 | 6.2 | 101 100 | 2.00 | 8.0 | 104 * Half the stated coupon is assumed to be paid every six months. (a) Calculate zero rates for maturities of 6 months, 12 months, 18 months, and 24 months. (b) What are the forward rates for the following periods: 6 months to 12 months, 12 months to 18 months, and 18 months to 24 months? (c) What are the 6-month, 12-month, 18-month, and 24-month par yields for bonds that provide semiannual coupon payments? (d) Estimate the price and yield of a 2-year bond providing a semiannual coupon of 7% per annum.
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0 / 2)^(1 / 0.5) - 1 = 0.0 For 12 months: Zero Rate = (1 + 0.0 / 2)^(1 / 1.0) - 1 = 0.0 For 18 months: Zero Rate = (1 + 6.2 / 2)^(1 / 1.5) - 1 = 0.0408 or 4.08% For 24 months: Zero Rate = (1 + 8.0 / 2)^(1 / 2.0) - 1 = 0.0392 or 3.92% Show more…
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