Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
Consider a 4-years bond with a 8% annual coupon rate and semi-annual payments. Let us suppose that the zero coupon curve rate today with annual compounding is given by the one in Table 1.
(a) Calculate the discount factors for all the previous maturities and then the
(b) Calculate the equivalent continuous compounding rates. What do you expect as result for the bond price with these rates? Should it be lower, higher or equal to the one in part (a)? Why? The equivalent continuous compounding rates should be lower than the annual rates. Why?
Transcribed Image Text:Maturity (years) ZC rate (%)
0.5
2
1
3
1.5
3.5
2
5
2.5
5.7
3
6
3.5
7
4
8.2
TABLE 1. ZC curve for Question 3.
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