## Bond Markets Strategies

• Uncategorized

4

1. The prices of 1 year, 2 year, 3 year and 4 year zero coupon bonds that pay \$952,381, \$898,473, \$842,054 and \$786,232. Calculate the annualised yields of the corresponding 1 year yield and 1 year forward rates.

Solution

ForwardRate

 Bond Price Forward Rate Year 1 952,381 Year 2 898,473 6.0% Year 3 842,054 6.7% Year 4 786,232 7.1%
1. Consider a 3 year bond with coupon rate 4% paid annually. Its yield to maturity is 6% and its face value is \$1,000.

1. Calculate the price of the bond and duration of bond.

Bondprice

Inthis case, the coupon rate is 4 percent and the face value is \$1,000,so the annual coupon is \$40.

Presentvalue of semiannual coupons

Presentvalue of \$1,000 principal

Theprice of the bond is the sum of the present value of coupons andprincipal

Durationof the Bond

1. Calculate the proportionate change in the bond price if yield to maturity increases to 6.10% using the following formula

ReferenceList

Bogomolov,R. and Khametov, V., 2016. Bayesian binomial zero-coupon bonds model.AppliedEconometrics,42,pp.100-120.

Reher,G. and Wilfling, B., 2014. The valuation of European call options onzero-coupon bonds in the run-up to a fixed exchange-rate regime.InternationalReview of Economics &amp Finance,29,pp.483-496.

Smith,D.J., 2011. Zero‐CouponBonds. BondMath: The Theory behind the Formulas,pp.23-38.