Fina 0301-2D Homework 3 1 Note: Due date and time: 5:00pm (Friday) 19th April, 2013. Please hand in the hard copy stated with your student ID and full name to Roger’s mailbox no.A50 at KKL 9/F. But please do not submit soft-copy via email. Once dropped in the box, no amendment would be allowed. Neat hand-writing or typesetting will be much appreciated! 1. (FRA) (a) On May 15, 2000 you enter into a 1-year forward rate agreement (FRA) with a bank for the period starting November 15, 2000 to May 15, 2001. You know that currently the price of the 6-month zero coupon is $96.79 and the price of the 1-year zero coupon is $93.51. (Nominal value of ZCB at expiration is $100) i. What is the agreed-upon forward rate in the transaction? (Please provide your answer in non-annualized form.) ii. What is the value of the forward at inception? (b) Three months later (August 15, 2000) you have second thoughts and consider that you should get out of the transaction. You receive the data below:-August 15, 2000 November 15, 2000 Maturity Z(0; T) Maturity Z(0; T) 0.25 0.9844 0.25 0.9848 0.50 0.9690 0.50 0.9692 0.75 0.9531 0.75 0.9545 1.00 0.9386 1.00 0.9402 i. What is the value of the FRA on August 15, 2000? (Assume the notional amount is $100 Million.) ii. Consider now November 15, 2000. A. What is the value of the FRA now? B. What is the floating rate? C. What will the balance to be paid at the end of the FRA?
2. (Swap) 2 Maturity Yield (c.c.) 0.25 2.70% 0.5 2.76% 0.75 2.86% 1 2.95% 1.25 3.09% 1.5 2.98% 1.75 3.07% 2 3.20% Table 1: The Yield Curve on May 5, 2008 Today is May 5, 2008, and the (c.c. means continuously compounded) yield curve is given in the above table. Calculate the semi-annual swap rate. (i.e. for all maturities every six months between 0.5 and 2 years). 3. (Bond YTM) Consider a 10-year coupon bond paying 6% coupon rate. (a) What is its price if its yield to maturity is 6%? What if it is 5% or 7%? (b) Compute the price of the coupon bond for yields ranging between 1%…