Several months ago, BUDDY Inc. issued a unique fixed income security. As of today, the security is maturing in 10 months

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Several Months Ago Buddy Inc Issued A Unique Fixed Income Security As Of Today The Security Is Maturing In 10 Months 1 (199.01 KiB) Viewed 104 times

Several months ago, BUDDY Inc. issued a unique fixed income security. As of today, the security is maturing in 10 months. The security pays semi-annual interest, which is equal to X% minus 3% p.a., where X is equal to the sum of the 6-month and 3-month LIBOR rates. That is, in every six months, the interest is defined as: L6 L3 3% 2 4 2 - + where L6 (quoted on an annual basis, in %) is the 6-month LIBOR and L3 (also quoted on an annual basis, in %) is the 3-month LIBOR. Assume that the 6-month LIBOR is always greater than the 3- month LIBOR and the 3-month LIBOR is always greater than 3% p.a. At maturity, the company will pay $100 as the face value of the security. Also, assume all other bonds and floating rate notes have a face value of $100, respectively. Table 1 shows the 3-month and 6-month LIBOR rates observed several months ago: Table 1 2 months ago 1 month ago 3-month LIBOR 4.0% p.a. 4.2% p.a. 6-month LIBOR 4.6% p.a. 5.3% p.a. For example, two months ago, the 3-month LIBOR rate was observed at 4.0% p.a. Table 2 shows the predicted 3-month and 6-month LIBOR rates over the next few months: Table 2 4 months from today 10 months from today 3-month LIBOR 6.3% p.a. 6-month LIBOR 6.5% p.a. 7.0% p.a. For example, four months from today, the 3-month LIBOR rate is predicted equal to 6.0% p.a. 6.0% p.a. Table 3 shows the current LIBOR rates (assume continuous compounding) with different maturities over the next 10 months: Table 3 Maturity LIBOR Maturity LIBOR 1 5.7% p.a. 6 6.2% p.a. 2 5.8% p.a. 7 6.3% p.a. 3 5.9% p.a. 8 6.4% p.a. 4 6.0% p.a. 9 6.5% p.a. 5 6.1% p.a. 10 6.6% p.a. For example, the current 3-month LIBOR rate is 5.9% p.a. compounded continuously. Required: Calculate the current price of the security. Show all working.