For this homework assignment, you need to use Excel. Once you done, upload your excel file to...

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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

Meenakshee · Accepted Answer

Sheet1
	Part 2			Price in $
	Solution 1	Bond Price using Spot Rates
		Face Value	1000
		Coupon Amount	30
		Period	Spot Rate (%)	Present Value of Coupon
		1	0.9	29.73
		2	1.3	59.23
		3	1.8	88.41
		4	2.3	1,094.82
		Total		1,272.19
	Solution 2	Implied Forward Rates
		Period		Forward Rates
		1	F(0,1)	0.9
		2	F(1,2)	1.7842105263
		3	F(2,3)	3.1497164461
		4	F(3,4)	4.4023369169
	Solution 3	Bond Price using Forward Rate
		Face Value	1000
		Coupon Amount	30
		Period	Spot Rate (%)	Present Value of Coupon
		1	0.9	29.73
		2	1.7842105263	58.95
		3	3.1497164461	87.25
		4	4.4023369169	1,072.77
		Total		1,248.71
	Solution 4	Bond Price using Backward Induction Method			1018.7226805134
		Face Value	1000
		Coupon Amount	30
				T=1		T=2			T=3		T=4		T=5
										0.5	4.35		1030
									2.45		945.9154475569	1030/(1+4.35/100)^2
							0.5		946.2098906872	0.5
						1.1					2.5		1030
					0.5	977.7664050834	0.5			0.5	980.3688280785	1030/(1+2.5/100)^2
				0.45					1.4
				1018.7226805134	0.5		0.5		992.5812607734	0.5
						0.9					1.45		1030
						1018.0572224612	0.5			0.

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...

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