question archive The 1-year forward rate of interest at time t = 1 year is 5% per annum effective

The 1-year forward rate of interest at time t = 1 year is 5% per annum effective

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The 1-year forward rate of interest at time t = 1 year is 5% per annum effective. The gross redemption yield of a 2-year fixed-interest stock issued at time t = 0 is 5.5% per annum effective. This 2-year fixed-interest stock pays coupons of 3% per annum annually in arrears and is redeemed at £102. The issue price at time t = 0 of a 3-year fixed-interest stock, bearing coupons of 10% per annum payable annually in arrears and redeemed at par, is £108.9 per £100 nominal. (a) Calculate the 1-year spot rate per annum effective at time t = 0. [4 marks] (b) Calculate the 1-year forward rate per annum effective at time t = 2 years. (c) Calculate the 2-year par yield at time t = 0.

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1-year forward rate per annum at t=2 years :

Maturity value = 102

Redemption amount = 108.9

Forward rate = (108.9/102 ) -1 = .06764 or 6.75%

Forward rate = 6.75% 1 year forward at t=2 years

2 year par yeild at time t =0

coupon amt /yield to maturity = 10%/