Finance Problem Sets Essay

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bond pays you $1,000 at the end of this year (Year 1) and $1,500 at the end of Year 2. The current one-year spot rate is 4% and the current two-year spot rate is 4.5%. Calculate the duration of this bond.

Use DURATION function on Excel ?

Using the partial durations calculated in #4a, how much would the bond's price change if the one-year spot rate decreased by 100 basis points and the two-year spot rate dropped 50 basis points?

Percentage price change = - Duration x Yield change x 100

-2.6 * -0.01 * 100 = 2.

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6% increase for r1 =3%,

-0.005 * 100 = 1.3% increase for r2 = 4%

The one-year spot rate (r1) is 6%, and the forward rate for a one-year loan maturing in year 2 ( f2) is 6.4%. Similarly, f3= 7.1%, f4 = 7.3%, f5 = 8.2%. What are the spot rates r2, r3, r4, and r5?

(1+r (0,2))2 = (1+r (0,1)) x (1+f (1,2))1, (1+.06) x (1+.064) =.....

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