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Question 4(10 Marks) Suppose you observe the following market data on debt securities: Note:...

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Accounting

Question $4 (10$ Marks $)$

Suppose you observe the following market data on debt securities:

Note: Data deviates from the current market conditions as it simplifies the calculations.

Required:

$($ a $)$ What are the continuously compounded zero $-$ coupon yields for $6$ months and one year,

respectively? Report your answer in percentage $(%)$ with $4$ dps $.$ i $.$ e $. . %$

$($ b $)$ What is the of the following default $-$ free bond portfolio? $(4$ dps $)$

Note: Each bond has a face value of $ $1.00$ and coupons are paid semi $-$ annually. You

should assume the zero $-$ coupon rate calculated in part $($ a $)$ above.

Hint: Use the following formula to measure the duration of the bond portfolio, i $.$ e $.,$

$D_{B} = \frac{_{i = 1}^{n} t_{i} c_{i} e^{- r t_{i}}}{_{i = 1}^{n} c_{i} e^{- r t_{i}}},$

$i^{t h}$ period.

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