Consider a semi-annual coupon bond. Its face value is $1,000, it bears a 6 percent coupon rate per year, and will mature

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Consider A Semi Annual Coupon Bond Its Face Value Is 1 000 It Bears A 6 Percent Coupon Rate Per Year And Will Mature 1 (246.51 KiB) Viewed 78 times

Consider a semi-annual coupon bond. Its face value is $1,000, it bears a 6 percent coupon rate per year, and will mature in 2 years. (Note: You must show all the steps on how to obtain the values or your attempt will be penalized.) Maturity Spot Rates 0.9 10.5 1.3 1.0 1.5 2.0 Forward Rates f1= f(0,0.5) f2 = f(0.5,1) f3 = f(1,1.5) f4 = f(1.5,2) 1.8 2.3 1) Calculate the respective implied forward rates from the corresponding spot rates. 2) Calculate the bond price using the implied forward rates using the following equation. C2 C3 C4 P= (1+fı) '(1+f1)(1+f2' (1+f;)(1+f2)(1+f3" (1+f1)(1+f2(1+f3)(1+fa) + + + 3) Suppose that the CIR model generates the following binomial interest tree (forward rates) lattice. Calculate the bond price using the backward induction method. t=1 t=2 t=3 t=4 0.90 14.9 8.7 2.2 1.8 2.8 1.6 5.0 2.9 1.7 4) Check whether the bond price from 3) is the same as the bond price from 2).