1) A 9-year 6% coupon bond currently sells for $86.

A 9-year 2% coupon bond

currently sells for $77. What is the 9-year zero rate (in percent)? Give your
answer to two decimal places.
Solve

We call:
(A) 86 = 6e−r ∗1+ 6e−r ∗2+ 6e−r ∗3+...+ 106e−r ∗9
1 2 3 9

(B) 77 = 2e−r ∗1+ 2e−r ∗2+ 2e−r ∗3+...+ 102e−r ∗9

1 2 3 9

(A) − 3(B) => 86 - 3*77 = 106e−r ∗9 − 3*( 102e−r ∗9)

9 9

=> r 9 = 3,57%

2) A 5-year bond with a yield of 7% (continuously compounded) pays a 7% coupon at

the end of each year. Estimate the bond’s price, bond’s duration. Give your answer
to two decimal places.
Solve
Assuming Face value = $100
=> PMT = $100 * 7% = 7
4
a) Bond’s price: B = ∑ (7 e
−7 %x
) + 107e−7 %∗5= 98,98
x=1
4
x∗7 e−7 %x 107 e
−7 %∗5
b) Duration: D = ∑ ( ) + 5* = 5,91 years
x=1 98 , 98 98 , 98

3) The 6-month and 9-month zero rates with continuous compounding are 3,5% and
3,6% per annum, respectively. Calculate forward interest rates for the third quarter
from now (in percent). Give your answer to two decimal places.
Solve
%∗9 %∗6
3 ,6 −3 ,5
12 12
Third quarter = = 3,8%
9 6
−
12 12

4) A 5-year bond with a yield of 7% (continuously compounded) pays a 6% coupon at

the end of each year. What is the bond’s duration? Give your answer to two
decimal places.
Solve
Assuming Face value = $100
=> PMT = $100 * 6% = 6
 4
Bond’s price: B = ∑ (6 e
−7 %x
) + 106e−7 %∗5= 94,91
x=1
4
x∗6 e−7 %x 106 e
−7 %∗5
Duration: D = ∑ ( ) + 5* = 4,45 years
x=1 94 ,91 94 , 91

5) The table below gives Treasury zero rates and cash flows on a Treasury bond. Zero
rates are continuously compounded. What is the bond’s theoretical price? Give
your answer to two decimal places.

Maturity (years) Zero rate Coupon payment Principal

0.5 2,1% $20

1.0 2,4% $20

1.5 2,9% $20

2.0 3,5% $20 $1000

Solve
Bond price: B = 20e−2 ,1 %∗0 ,5 + 20e−2 , 4 %∗1 + 20e−2 , 9%∗1 ,5 + 1020e−3 ,5 %∗2 = 1009,51

6) A 5-year bond with a yield of 5% (continuously compounded) pays a 7% coupon at

the end of each year. Use the duration to calculate the percentage change (in
percent) on the bond’s price of a 0,4% decrease in its yield. Give your answer to
two decimal places.
Solve
Assuming Face value = $100
=> PMT = $100 * 7% = 7
4
Bond’s price: B = ∑ (7 e−5 %x ) + 107e−5 %∗5 = 108,08
x=1

The new yield = 5% − 0,4% = 4,6%

4
Bnew =¿ ∑ (7 e−4 ,6 %x ) + 107e−4 ,6 %∗5 = 110,01
x=1

Δ B Bnew −B
= =1 , 77
B B

7) A deposit account pays 4,1% per annum with continuous compounding, but interest
is actually paid quarterly. How much interest will be paid each quarter on a
$10892 deposit? Give your answer to two decimal places.
 Solve
%∗3
Interest = Present value * (e ¿¿ rt−1)¿ = 10892* (e ¿ ¿ 4 ,1 −1)¿ = 112,22
12

8) The cash prices of 6-month and 1-year Treasury bills are $93,5 and $85,6. A 1.5-year
Treasury bond that will pay coupons of $4,3 every 6 months currently sells for
$95,1. Calculate the 1.5-year Treasury zero rates (in percent). Give your answer to
two decimal places.
Solve
%∗6
6-month: 100 = 93,5e r 12 => r% = 13,44%
%∗12
12-month: 100 = 85,6e r =¿ r% = 15,55%
12

1,5-year Treasury zero rates: 4,3e−13 ,44 %∗0 ,5 + 4,3e−15 ,55 %∗1+ 104,3e−r %∗1 ,5= 95,1
=> r% = 11,79%

9) A bank quotes an interest rate of 2,8% per annum with quarterly compounding. What
is the equivalent rate with continuous compounding (in percent)? Give your
answer to two decimal places.
Solve
r 2 ,8 %
r m = m*lin ¿1+ ¿=4 lin ¿+ ¿ = 2,79%
m 4

10) An investor receives $1121 in one year in return for an investment of $1000 now.
Calculate the percentage return per annum with monthly compounding. Give your
answer to two decimal places.
Solve
r%
The percentage return: 1000*(1+ ¿ = 1121 =>r% = 11,48%
12

11) A bond with a face value of $100 has a life of 18 months and pays a coupon of 5%
per annum (with semiannual payments and one having just been made), the yield
is 5,2% per annum with semiannual compounding. What is the bond’s price? Give
your answer to two decimal places.
Solve
F∗c 100∗5 %
Cash flow: C = = = 2,5
m 2
(n: cash flows of 18 months with semiannual is 3)
(m: total number of years to maturity)
 C C C F +C
1
+ 2
+ ...+ n∗m
+ n∗m
=¿
Bond’s price: P = Yield Yield Yield Yield
(1+ ) (1+ ) (1+ ) (1+ )
m m m m
2,5 2 ,5 100+2 ,5
1
+ 2
+...+ 6
=99 , 71
5 ,2 % 5,2% 5 ,2 %
(1+ ) (1+ ) (1+ )
2 2 2