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QUESTION 6 (15 marks) It is known that the 1-year par bond yield is 5% per annum and the 2-year par bond yield is 6% per annum. A 3-year coupon bond with annual coupon payments at a rate of 4% per annum. and will be redeemed at par and provides a yield to maturity of 7% per annum. Assume that there are no taxes and coupon payments are payable in arrears. (a) Calculate the 1-year, 2-year, and 3-year discrete spot rates, rounded to 2 decimal places in % throughout the calculation process. (6 marks) (b) Calculate the 1-year discrete forward rates of interest as well as the instantaneous forward force, starting in 2 years' time. Round your results to 2 decimal places in %. (2 marks) () Calculate the 3-year par yield, rounded to 2 decimal places in %. (2 marks) (d) Suppose we know that the 3-year par bond yield is 6.97%, and a 3-year zero-coupon bond with a face value of $1 has a price of $0.88, whereas a 4-year zero-coupon bond with a face value of $1 has a price of $0.85. Assuming that there are no arbitrage opportunities in the market, calculate the price of a 4-year annual coupon bond with a coupon rate of 7% per annum and a face value of $1,000 (5 marks) QUESTION 6 (15 marks) It is known that the 1-year par bond yield is 5% per annum and the 2-year par bond yield is 6% per annum. A 3-year coupon bond with annual coupon payments at a rate of 4% per annum. and will be redeemed at par and provides a yield to maturity of 7% per annum. Assume that there are no taxes and coupon payments are payable in arrears. (a) Calculate the 1-year, 2-year, and 3-year discrete spot rates, rounded to 2 decimal places in % throughout the calculation process. (6 marks) (b) Calculate the 1-year discrete forward rates of interest as well as the instantaneous forward force, starting in 2 years' time. Round your results to 2 decimal places in %. (2 marks) () Calculate the 3-year par yield, rounded to 2 decimal places in %. (2 marks) (d) Suppose we know that the 3-year par bond yield is 6.97%, and a 3-year zero-coupon bond with a face value of $1 has a price of $0.88, whereas a 4-year zero-coupon bond with a face value of $1 has a price of $0.85. Assuming that there are no arbitrage opportunities in the market, calculate the price of a 4-year annual coupon bond with a coupon rate of 7% per annum and a face value of $1,000

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