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(FINA361)[2011](s)quiz~fn_csxag^_78588.pdf
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Hong Kong University of Science and Technology
March 2, 2011
FIXED INCOME SECURITIES (FINA361) Assignment 2
Exercise 1: Spot Rates, Par Rates and Forward Rates
You observe the yields of the following Treasury Securities (all yields are shown on a bond equivalent basis). All the securities maturing from 1.5years on are selling at par. The 0.5 and 1year securities are zero coupon bonds.
Period Year Par Coupon
Rates

1 0.5 0.90

2 1 0.95

3 1.5 1.20

4 2 1.45

5 2.5 1.70

6 3 1.95

7 3.5 2.20

8 4 2.45

9 4.5 2.70
10 5 2.95


11 5.5 3.20
12 6 3.45


13 6.5 3.70
14 7 3.95


15 7.5 4.20
16 8 4.45


17 8.5 4.70
18 9 4.95


19 9.5 5.20
20 10 5.45



a) Find the term structure of interest rate. b) Using the term structure of interest rate find the price of a 2.8% coupon paid semi-annually and 4 year maturity US Treasury security. c) What would be the corresponding yield to maturity for the 2.8% 4year UST security
priced above? d) Calculate the forward rate curve. e) What are the 1 year in 2 year forward rate f4x6, and the 2year in 4year forward rate f8x12?

Exercise 2: Pricing Floating Rate Notes
The B bond trades (that is the coupon) at 50bps above the forward curve given below. This floater has a 5year maturity, par value at maturity and payments are done semi-annually. The market is pricing the floater at 30bp margin.
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Hong Kong University of Science and Technology
March 2, 2011
a) What is the price of the floater as of now?
b) What is the new price of the floater if the forward curve drops by 15bps?
c) What is the spread duration of the floater for 10bps move in the spread?

Period Years Forward Rates
1 0.5 0.3700
2 1 0.8772
3 1.5 1.3933
4 2 1.9194
5 2.5 2.4579
6 3 3.0107
7 3.5 3.5801
8 4 4.1688
9 4.5 4.7798
10 5 5.4167



To be returned by March 9, before the class. Only hardcopy accepted.

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