Problem 1: Based on the Treasury rates table above, calculate the one-year forwa

Question

Problem 1: Based on the Treasury rates table above, calculate the one-year forward rate one year from today.

Problem 2: Based on the Treasury rates table provided in this homework, calculate the two-year forward rate one year from today.

Problem 3: Based on the Treasury rates table provided in this homework, calculate the three-year forward rate two years from today.

Problem 4: Fooling Company has a 9.75 percent callable bond outstanding on the market with 25 years to maturity, call protection for the next 10 years. In other words, there are 10 years until the bonds may be called. The call premium is $100 and the par value for each bond is $1,000. What is the yield to call (YTC) for this bond if the current price is 99.5 percent of par value, using semi-annual compounding assumption?

Problem 5: Mama Simps Company has zero coupon bonds, callable in 15 years at a call price of $750. The par value for each bond is $1,000. What is the yield to call (YTC) for this bond if the current price is currently trading at $695.99, using semi-annual compounding assumption?

Treasurys 3:05 p.m. EDT 11/02/17 Price Chg 2/32 Yield 1-Month Bill 3-Month Bill 6-Month Bill 1-Year Note 2-Year Note 3-Year Note 5-Year Note 7-Year Note 10-Year Note 30-Year Bond * at close See Full Daily Closing Prices 0.997 1.154 1.281 1.441 1.624 1.726 2.000 2.206 2.348 2.829 0/32 1/32 3/32 4/32 7/32 19/32

Explanation / Answer

1) Using expectation theory

(1 + S2)^2 = (1 + S1) x (1 + 1F1)

Here, S2 - Current 2-year rate, S1 - Current 1-year rate, 1F1 - 1-year forward rate 1-year from today

=> (1 + 1.624%)^2 = (1 + 1.441%) x (1 + 1F1)

=> 1F1 = 1.807%

2) Similarly,

(1 + S3)^3 = (1 + S1) x (1 + 1F2)^2

=> (1 + 1.726%)^3 = (1 + 1.441%) x (1 + 1F2)^2

=> 1F2 = 1.869%

3) (1 + S5)^5 = (1 + S2)^2 x (1 + 2F3)^3

=> (1 + 2%)^5 = (1 + 1.624%)^2 x (1 + 2F3)^3

=> 2F3 = 2.251%

4) YTC can be calculated using I/Y function on a calculator

N = 10 x 2 = 20, PMT = 9.75% x 1000 / 2 = 48.75, PV = -99.5% x 1000 = -995, FV = 1000 + 100 = 1100

=> Compute I/Y = 5.21% (semi-annual)

=> Annualized YTC = 5.21% x 2 = 10.42%

5) N = 15 x 2 = 30, PMT = 0, PV = -695.99, FV = 750 => Compute I/Y = 0.25% (semi-annual)

Annualized YTC = 2 x 0.25% = 0.50%

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

---