From Federal Reserve Economic Data (FRED), we have obtained spot zero rates as follows: Spot zero Year rate 0.5 2% 1 3% 1.5 2 4% 2.5 ? 3 5% We want to calculate the price of a 3-year bond which pays 10% coupon (semi-annual). The face value of the bond is $1,000. However, the problem is that we do not know 1.5-year and 2.5-year spot zero rates. If we use linear interpolation method, what are the 1.5-year and 2.5-year spot zero rates? The 1.5-year spot rate is 3.50% and 2.5-year spot rate is 4.50% The 1.5-year spot rate is 1.75% and 2.5-year spot rate is 2.25% The 1.5-year spot rate is 1.70% and 2.5-year spot rate is 2.20% The 1.5-year spot rate is 3.40% and 2.5-year spot rate is 4.40%

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
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From Federal Reserve Economic Data (FRED), we have obtained spot zero rates as follows:
Spot zero
Year
rate
0.5
2%
1
3%
1.5
2
4%
2.5
?
3
5%
We want to calculate the price of a 3-year bond which pays 10% coupon (semi-annual). The face value of the bond
is $1,000. However, the problem is that we do not know 1.5-year and 2.5-year spot zero rates.
If we use linear interpolation method, what are the 1.5-year and 2.5-year spot zero rates?
The 1.5-year spot rate is 3.50% and 2.5-year spot rate is 4.50%
The 1.5-year spot rate is 1.75% and 2.5-year spot rate is 2.25%
The 1.5-year spot rate is 1.70% and 2.5-year spot rate is 2.20%
The 1.5-year spot rate is 3.40% and 2.5-year spot rate is 4.40%
Transcribed Image Text:From Federal Reserve Economic Data (FRED), we have obtained spot zero rates as follows: Spot zero Year rate 0.5 2% 1 3% 1.5 2 4% 2.5 ? 3 5% We want to calculate the price of a 3-year bond which pays 10% coupon (semi-annual). The face value of the bond is $1,000. However, the problem is that we do not know 1.5-year and 2.5-year spot zero rates. If we use linear interpolation method, what are the 1.5-year and 2.5-year spot zero rates? The 1.5-year spot rate is 3.50% and 2.5-year spot rate is 4.50% The 1.5-year spot rate is 1.75% and 2.5-year spot rate is 2.25% The 1.5-year spot rate is 1.70% and 2.5-year spot rate is 2.20% The 1.5-year spot rate is 3.40% and 2.5-year spot rate is 4.40%
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