What is the par-coupon rate curve for this term structure

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Reference no: EM132172450

Question - Term Structure: Term structure is given by the following vector, (0.02, 0.05, 0.051, 0.052, 0.065, 0.045, 0.05, 0.06, 0.065, 0.07), for horizons (0.5, 1, 1.5, 2, 2.5, 3, 3.5, 4, 4.5, 5), respectively. Bond A is a zero-coupon bond with 3 years remaining. The bond is trading at 87.37159117. Bond B is a 5%-coupon bond with 2 years remaining. The bond is trading at 99.04467342. Bond C is a 3%-coupon bond with 2.5 years remaining. It trades at 91.92991936.

Suppose, additionally, there are zero-coupon bonds trading for all relevant maturities, and that they are priced according to the term structure given.

(a) Search for arbitrage in this data.

(b) Set up portfolios to exploit the mispricing you identified in the previous question.

(c) What is the 1-year forward rate curve for this term structure? Derive the formula and compute for the first three points on the curve.

(d) What is the par-coupon rate curve for this term structure? Derive the formula and compute for the first three points on the curve.

Reference no: EM132172450

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