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Tutorial 2

This document contains 14 practice problems related to interest rates, forward rates, and bond pricing. The problems cover topics like calculating the value of a forward rate agreement (FRA), determining equivalent interest rates under different compounding methods, estimating bond prices using spot rates, and calculating forward rates from given zero rates or spot rates.

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Nguyễn Quỳnh
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151 views

Tutorial 2

This document contains 14 practice problems related to interest rates, forward rates, and bond pricing. The problems cover topics like calculating the value of a forward rate agreement (FRA), determining equivalent interest rates under different compounding methods, estimating bond prices using spot rates, and calculating forward rates from given zero rates or spot rates.

Uploaded by

Nguyễn Quỳnh
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Tutorial 2 Questions

Problem 4.5
Assuming that SOFR rates are as follows

Maturity (months) Rate (% per annum)


3 3.0
6 3.2
9 3.4
12 3.5
15 3.6
18 3.7

What is the value of an FRA where the holder will pay SOFR and receive 4.5% (quarterly
compounded) for three months period starting in one year on a principal of $1000000?

Problem 4.8.
What rate of interest with continuous compounding is equivalent to 8% per annum with
monthly compounding?

Problem 4.10.

Suppose that 6-month, 12-month, 18-month, 24-month, and 30-month spot rates are 4%,
4.2%, 4.4%, 4.6%, and 4.8% per annum with continuous compounding respectively. Estimate
the price of a bond with a face value of 100 that will mature in 30 months and pays a coupon
of 4% per annum semiannually.

Problem 4.13.
Suppose that zero interest rates with continuous compounding are as follows:

Maturity( years) Rate (% per annum)


1 2.0
2 3.0
3 3.7
4 4.2
5 4.5

Calculate forward interest rates for the second, third, fourth, and fifth years.

Problem 4.24
An interest rate is quoted as 5% per annum with semiannual compounding. What is the
equivalent rate with (a) annual compounding, (b) monthly compounding, and (c) continuous
compounding?
Additional Problem 1.
The 6-month, 12-month. 18-month, and 24-month zero rates are 4%, 4.5%, 4.75%, and 5%
with semiannual compounding.
a) What are the 18- and 24-months rates with continuous compounding?
b) What is the forward rate for the six-month period beginning in 18 months?
+ With continuous compounding
+ With semiannual compounding

Additional Problem 2.
The following table gives the prices of bonds
Bond Principal ($) Time to Maturity (yrs) Annual Coupon ($) * Bond Price ($)
100 0.5 0.0 98
100 1.0 0.0 95
100 1.5 6.2 101
100 2.0 8.0 104

*Half the stated coupon is paid every six months

a) Calculate spot rates for maturities of 6 months, 12 months, 18 months, and 24 months.
b) What are the forward rates (with continuous compounding) for the periods: 6 months
to 12 months, 12 months to 18 months, 18 months to 24 months?

Additional Problem 3.
Suppose that the six-month rate is 5% per annum and the nine-month rate is 6% per annum
with continuously compounded compounding.
a) What is the 3-month forward rate starting in 6-month time?
b) If an investor buys a 6-month FRA for a 3-month loan with the notional principal of
$1,000,000, what should be the fixed borrowing rate?
c) Suppose that after 6 months, the market rate for a $1,000,000 loan with a maturity of 3
months is 9% per annum (with quarterly compounding). What is the amount of cash
settlement that the investor pays/receives according to this FRA?

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