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FIN 7000 Problem Set 2

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Question;Problem 1: Fill in the table below for each of the;following interest rates;Compounding;PV;of $1000;Case Stated Annual;Rate Periods Per Year Effective Annual Rate at t = 2;1.12 1;2.12 2;3.12 4;4.12 12;5.12 24;6.12 infinity;Problem 2;The effective annual rate is 3% (i.e., re =.03). What is the stated rate for compounding semi-annually;that is associated with this effective rate?;That is, solve for rs such that 1+re = (1+(rs/2))2;given re =.03.;Problem 3;Consider the following information on a yield curve (where t = 0 is;now);Time (in years) to;Maturity (TTM) Effective;Annual Rate;.01.015.02.0225.0235;Part 1: Using this yield curve, calculate the present;value of the following payment streams;$100 at t = 1,$100 at t = 2,$100 at t = 3,$100 at t = 4,$100 at t = 5,$100 at t = 1 and $100 at t = 4$200 at t = 2 and $200 at t = 5;Part 2;Also using the above yield curve, calculate the forward rate for the;one-year yield next year at t =;1. If you take your answer to b above;divided by your answer to a above and then subtract 1, do you get the same;answer?;Part 3: Consider the following two strategies for;getting a return over three years;Strategy 1;Invest for three years at the three year rate;Strategy 2: invest at the two-year rate for two years and;then roll over into the one-year rate in two years.;You can calculate a forward rate for the one-year;rate in two years (at t = 2) by considering the one-year rate in two years that;would make you indifferent between Strategy 1 and Strategy 2. What is that forward rate?

 

Paper#49458 | Written in 18-Jul-2015

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