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Problem set 2 fin 7000

Problem Set 2 FIN 7000   Problem 1:  Fill in the table below for each of the following interest rates: […]

Problem Set 2 FIN 7000
 
Problem 1:  Fill in the table below for each of the following interest rates:
 
                                                                Compounding                                                                                   PV of $1000
Case      Stated Annual Rate         Periods Per Year               Effective Annual Rate                    at t = 2
   1                    .12                                      1
   2                    .12                                      2
   3                    .12                                      4
   4                    .12                                    12
   5                    .12                                    24
   6                    .12                                infinity
 
Problem 2:    
 
The effective annual rate is 3% (i.e., re = .03).  What is the stated rate for compounding semi-annually that is associated with this effective rate?   That is, solve for rs such that 1+re = (1+(rs/2))2 givenre = .03.
 
Problem 3:
 
Consider the following information on a yield curve (where t = 0 is now)
 
                Time (in years) to Maturity (TTM)             Effective Annual Rate                   
1                                                                                                     .01                                              
2                                                                                                     .015
3                                                                                                     .02
4                                                                                                     .0225
5                                                                                                     .0235
 
Part 1:  Using this yield curve, calculate the present value of the following payment streams:
 
a.       $100 at t = 1,
b.      $100 at t = 2,
c.       $100 at t = 3,
d.      $100 at t = 4,
e.      $100 at t = 5,
f.        $100 at t = 1 and $100 at t = 4
g.       $200 at t = 2 and $200 at t = 5
 
Part 2:  Also using the above yield curve, calculate the forward rate for the one-year yield next year at t = 1.    If you take your answer to b above divided by your answer to a above and then subtract 1, do you get the same answer? 
 
Part 3:  Consider the following two strategies for getting a return over three years: 
 
Strategy 1:  Invest for three years at the three year rate;
Strategy 2:  invest at the two-year rate for two years and then roll over into the one-year rate in two years. 
You can calculate a forward rate for the one-year rate in two years (at t = 2) by considering the one-year rate in two years that would make you indifferent between Strategy 1 and Strategy 2.  What is that forward rate? 
 
 
 
 
 

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