Consider an inverse floating rate coupon bond with 1 year remaining to maturity. On maturity, bondholders are expected to receive $100 face value. Coupons are paid quarterly and the current 3-mth LIBOR observed rate is 5.234% p.a. The annual coupon rate is specified as: Annual coupon rate = 20% p.a. – 3C where Cis the annual 3-mth LIBOR rate. Assume, for simplicity, that the annual 3-mth LIBOR rate will never exceed 6.67% p.a. (so that the annual coupon rate defined above is always a positive number). The following table shows the current LIBOR continuously compounded rate with different maturities: Maturity LIBOR Maturity LIBOR 5.0% р.a. 5.1% р.a. 5.2% р.a. 5.3% р.a. 5.3% р,а. 5.4% p.a. 5.5% р.а. 5.5% p.a. 5.6% p.a. 5.7% p.a. 1 7 2 8 3 4 10 11 5.8% p.a. 12 5.9% p.a For example, the 1-mth LIBOR is 5.0% p.a. compounded continuously. You can treat the LIBOR rates presented in table above as the discount rates/spot rates with different maturities. Required: What is the current price of the inverse floating rate coupon bond? Show all of your workings.

Consider an inverse floating rate coupon bond with 1 year remaining to maturity. On maturity, bondholders are expected to receive $100 face value. Coupons are paid quarterly and the current 3-mth LIBOR observed rate is 5.234% p.a. The annual coupon rate is specified as: Annual coupon rate = 20% p.a. – 3C where Cis the annual 3-mth LIBOR rate. Assume, for simplicity, that the annual 3-mth LIBOR rate will never exceed 6.67% p.a. (so that the annual coupon rate defined above is always a positive number). The following table shows the current LIBOR continuously compounded rate with different maturities: Maturity LIBOR Maturity LIBOR 5.0% р.a. 5.1% р.a. 5.2% р.a. 5.3% р.a. 5.3% р,а. 5.4% p.a. 5.5% р.а. 5.5% p.a. 5.6% p.a. 5.7% p.a. 1 7 2 8 3 4 10 11 5.8% p.a. 12 5.9% p.a For example, the 1-mth LIBOR is 5.0% p.a. compounded continuously. You can treat the LIBOR rates presented in table above as the discount rates/spot rates with different maturities. Required: What is the current price of the inverse floating rate coupon bond? Show all of your workings.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 10P

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