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Page of 10 8. (10 pts.) Suppose you are given the following set of...

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Page of 10 8. (10 pts.) Suppose you are given the following set of spot rates: Time Period Oyly Oy2y Oy3y 7 8 Rate 6% ,035% .111% From these spot rates you infer the following forward rates: Time Period lylyd 2yly ate FREE 8.081% 10.295% What is the price of the bond if you expect no uncertainty (e... zero volatility) in future interest rates? Restated, what is the price of the callable bond if the future interest rates equal the current forward rates. Show all your work below. Page of 10 11. The duration of a callable bond is the duration of an otherwise equal non- callable bond because a. Equal to; they have the same cash flows, same tenor, and same yield. b. Greater than; if the bond is called it increases the tenor of the bond which mechanically increases its duration c. Greater than; callable bonds have higher cash flows making their durations longer. d. Less than; callable bonds are often not called which makes their durations less than that of comparable non-callable bonds. e. Less than the duration of a callable bond can only be less than or equal to that of a comparable non-callable bond because calling a bond moves the final cash flow of the bond earlier in time. Page

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