MATH 534 Midterm: MATH 537 UMass Amherst midtermS13soln
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Midterm: assume all spot rates are 5% per annum with continuous compounding. (a) compute the equivalent rate with quarterly compounding. e. 05 = (1 + r/4)4. R = 0. 0503 (b) consider a 8%-coupon bearing bond with principal which expires in 15 months. Compute the price and yield of the bond. 4. 8e . 05 3/12 + 4. 8e . 05 9/12 + 124. 8e . 05 15/12 = 126. 60: a bank has entered a swap where it pays the oating 6-month libor rate and receives a xed 8% per annum. Current libor rates on all maturities are 5% per annum with continuous compounding. Libor rate 3 months ago was 6% per annum. Compute the value of the swap to the bank. Value of swap is value of xed minus value of oat. Value of oat is (in millions) (10 + . 3)e . 05 3/12 = 10. 17. So swap worth 240,000: this problem continues on the next page.
