For this homework assignment, you need to use Excel. Once you done, upload your excel file to Blackboard. Do not submit HW4 via email. Part 1 Reading Assignments Read Chapter 7 in the textbook. Read LN7. Part 2 Practical Assignments using Excel Consider a semi-annual coupon bond. Its face value is $1,000, it bears a 6 percent coupon rate per year and will mature in 2 years. Maturity Period (t) Spot Rates (%) Forward Rates (% XXXXXXXXXXF1 = f(0, XXXXXXXXXXF2 = f(1, XXXXXXXXXXF3 = f(2, XXXXXXXXXXF4 = f(3,4) 1) Compute the bond price using the spot rates (i.e. annual compounding)equation. P = X 4 t=1 Ct (1 + Zt) t where Zt represents a zero rate at time t and Ct is a cash flow at time t. 2) Calculate the respective implied forward rates using the spot rates. 3) Calculate the bond price using the implied forward rates using the following equation. P = C1 (1 + F1) + C2 (1 + F1)(1 + F2) + C3 (1 + F1)(1 + F2)(1 + F3) + C4 (1 + F1)(1 + F2)(1 + F3)(1 + F4) Note that Ft = f(t,t+1) represents a forward rate between t and t XXXXXXXXXXSuppose that the CIR model generates the following binomial interest tree (forward rates) lattice. Calculate the bond price using the backward induction method. t=1 t=2 t=3 t= XXXXXXXXXX XXXXXXXXXX.7 5) Compare all the bond prices and provide your findings FINC 3380 Homework 5 Seungho Baek Due: Thursday, April 23 2020, 6:29 P.M. For this homework assignment, you need to use Excel. Once you done, upload your excel file to Blackboard. Do not submit HW4 via email. Part 1 Reading Assignments Read Chapter 7 in the textbook. Read LN7. Part 2 Practical Assignments using Excel Consider a semi-annual coupon bond. Its face value is $1,000, it bears a 6 percent coupon rate per year and will mature in 2 years. Maturity Period (t) Spot Rates (%) Forward Rates (%) 0.5 1 0.9 F1 = f(0,1) 1.0 2 1.3 F2 = f(1,2) 1.5 3 1.8 F3 = f(2,3) 2.0 4 2.3 F4 = f(3,4) 1) Compute the bond price using the spot rates (i.e. annual compounding)equation. P = X 4 t=1 Ct (1 + Zt) t where Zt represents a zero rate at time t and Ct is a cash flow at time t. 2) Calculate the respective implied forward rates using the spot rates. 3) Calculate the bond price using the implied forward rates using the following equation. P = C1 (1 + F1) + C2 (1 + F1)(1 + F2) + C3 (1 + F1)(1 + F2)(1 + F3) + C4 (1 + F1)(1 + F2)(1 + F3)(1 + F4) Note that Ft = f(t,t+1) represents a forward rate between t and t + 1. 1 4) Suppose that the CIR model generates the following binomial interest tree (forward rates) lattice. Calculate the bond price using the backward induction method. t=1 t=2 t=3 t=4 0.90 2.2 4.9 8.7 1.8 2.8 5.0 1.6 2.9 1.7 5) Compare all the bond prices and provide your findings. 2

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