None Your firm is currently in an interest rate swap, paying 3.00% fixed, receiving LIBOR+0.25%. The payments are semi-annual. The nominal value is $500M. Below is the relevant term structure of LIBOR rates. The LIBOR rate 3 months agowas 0.0600. (a) Complete the following table by filling in the zero - coupon price of a $1 bond. (b) What is the value ofthe fixed leg, based on a nominal value of $500,000,000? (c) What is the value of the variable leg, based on a nominalvalue of $500,000,000? d) What is the value of the swap, based on a nominal value of $500,000,000 LIBOR Rate Zero -coupon Price L(90) 0.0585 L(270) 0.0555 L(450) 0.0565 L(630) 0.0565

(c) Value of the Variable Leg:The variable leg involves receiving payments based on LIBOR rates.The…

Answered: Your firm is currently in an interest…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Your firm is currently in an interest rate swap, paying 3.00% fixed, receiving LIBOR+0.25%. The payments are semi-annual. The nominal value is $500M. Below is the relevant term structure of LIBOR rates. The LIBOR rate 3 months ago was 0.0600. (a) Complete the following table by filling in the zero-coupon price of a $1 bond. (Enter your answer with 4 decimals, such as 0.9987.) LIBOR Rate Zero-coupon Price L(90) 0.0585 L(270) 0.0555 L(450) 0.0565 L(630) 0.0565 b) What is the value of the fixed leg, based on a nominal value of $500,000,000? c) What is the value of the variable leg, based on a nominal value of $500,000,000? d) What is the value of the swap, based on a nominal value of $500,000,000?
Suppose that the prices of zero-coupon bonds with various maturities are given in the following table. The face value of each bond is $1,000. Maturity (Years) Price 1 $ 998.78 2 880.89 3 815.92 4 752.40 5 685.70 a. Calculate the forward rate of interest for each year. (Round your answers to 2 decimal places.) b. How could you construct a 1-year forward loan beginning in year 3? (Round your Rate of synthetic loan answer to 2 decimal places.) c. How could you construct a 1-year forward loan beginning in year 4? (Round your answers to 2 decimal places.)
you re creating a yield curve in order to price some forward rate agreements. You have assembled the following prices for bonds (all of which pay semi-annual coupons): Maturity Coupon (per annum) Price (per $100 face value) 6 months 2.25% 98.1363 12 months 1.75% 95.3758 18 months 6.50% 99.1579 (a) What are the discount factors for: i. 6 months? ii. 12 months? iii. 18 months? (b) What is the 6-18 month forward rate, quoted with semi-annual compounding?
Suppose that the prices of zero-coupon bonds with various maturities are given in the following table. The face value of each bond is $1,000. Maturity (Years) 1 2 3 4 5 Required: a. Calculate the forward rate of interest for each year. b. How could you construct a 1-year forward loan beginning in year 3? c. How could you construct a 1-year forward loan beginning in year 4? Required A Price $940.93 Complete this question by entering your answers in the tabs below. 868.39 800.92 735.40 670.48 Required B Maturity (years) 2 3 Calculate the forward rate of interest for each year. Note: Round your answers to 2 decimal places. Required C Forward Rate % % Prov 12 of 12 Next
Suppose that the prices of zero-coupon bonds with various maturities are given in the following table. The face value of each bond is $1,000. Maturity (Years) 1 2 3 4 5 Price $983.78 865.89 797.92 732.00 660.24 Required: a. Calculate the forward rate of interest for each year. b. How could you construct a 1-year forward loan beginning in year 3? c. How could you construct a 1-year forward loan beginning in year 4?
Suppose that yield rates on zero coupon bonds are currently 26 for a one-year maturity, 3% for a two-year maturity and 4.% for a three-year maturity (all effective annual rates). Suppose that someone is willing to borrow money from you starting one year from now to be repaid three years from now at an effective annual interest rate of 6.5146438635186%. Construct a transaction in which an arbitrage gain can be obtained. What is your positive net gain for net investment of 0? (net cashflow at t-3) 01345 One possible correct answer is: 0.030250290387703
The following table is the current term structure of interest rates based on $1,000 par value zero-coupon bonds.( full process) Bonds Years to Maturity Yield to Maturity (%) A 1 6.00 B 2 7.50 C 3 7.99 D 4 8.49 (a) According to the expectations hypothesis, what is the expected 1-year interest rate 1 year from now in terms of the current term structure of interest rates? (b) According to the liquidity preference theory, is the expected 1-year interest rate 1 year from now higher or lower than the one obtained in (a)? Explain your answer. (c) At what price should Bond C sell for two years from now based on the implied forward interest rates derived from the current term structure of interest rates?
A government bond with a par value of R1000, maturing in 5 years, offers an annual coupon of 9.5%, and a yield to maturity of 11.5%. PART A: What is the current value of the bond? Give your answer in Rands (R) correct to TWO decimal places.R........ PART B: Use the table approach to determine the value on the right-hand side of the convexity calculation. That is, what is the sum of the discounted cash flows, multiplied by (t2 + t)?Provide your answer correct to TWO decimal places. Answer.......... PART C: Given your results above, what is the convexity of this bond?Give your answer, correct to TWO decimal places. Answer....... PART D: If this bond has a modified duration of 4 and yields increase by 200 basis points, the correction for convexity ((∆P/P) will forecast that the bond price will decrease by what percentage?Provide your answer, in percent (%), correct to TWO decimal places. Answer% ..........You do not have to indicate the negative with `–` or `() `, simply provide your…
Suppose that the current one-year rate (one-year spot rate) and expected one-year government bonds over years 2, 3 and 4 are as follows: 1R1 = 4.80%, E(2r1) = 5.45%, E(3r1) = 5.95%, E(4r1) = 6.10% Assume that there are no liquidity premiums. To the nearest basis point, what is the current rate for the four-year-maturity government bond? 5.57% 5.62% 5.83% 6.10%
Suppose that there is a bank that is offering to lend and/or borrow money atan interest rate of 8% (regardless of the time-to-maturity of the loan).Further suppose that there is a two-year coupon bond trading with a facevalue of $100 and a coupon rate of 5% trading in the market. Price the bondusing an explicit no-arbitrage argument.a) Suppose that the bond in the previous question is actually trading for $92.Show how you could exploit the mispricing to make an arbitrage profit.( Question)
In the following problems, assume that the coupon rate is compounded semi-annually, and bonds are redeemable at par on maturity, unless otherwise stated. Calculate the missing values for Problems 1 and 2. 1. Face Value $1000.00 b. $10,000.00 ? Redemption Coupon Yield Value Rate Rate ? ? $20,000.00 7.10% 4.65% 2.30% 7.10% 3.80% 3.30% Purchase Date April 01, 2018 July 06, 2017 ? Redemption Date October 01, 2018 P October 20, 2029 Maturity ? 2.5 years 10 years Sold at Par/ at a Discount/ at a Premium ? 7 ?
You invested in a corporate bond that has a market price today of R1043.22 and a yield to maturity of 7%. This bond has a modified duration of 4.7. You believe that interest rates are going to rise by 195 basis points. What price do you expect your bond to trade at if this anticipated change in the yield occurs? Use the duration rule to calculate your answer, in Rands (R), correct to TWO decimal places.

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