< Final Assignment >

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* If the face value of a bond is not given, assume the face value as 100.

1. What would be the gains from trade of entering into a swap for these two firms?

Firm A Firm B

Fixed Rate 5% 9%

Floating Rate LIBOR + 1% LIBOR + 3%

2. From the following data, calculate the discount factors Z(0, 0.5), Z(0, 1), Z(0, 1.5) and Z(0, 2):

▪ The price of a 6-month zero coupon bond is 97.

▪ The semi-annually compounded forward rate f2(0, 0.5, 1) is 2%.
▪ The price of a 1.5-year semi-annual coupon bond with 3% coupon rate is 103.
▪ The price of a 2-year semi-annual coupon bond with 2% coupon rate is 101.

3. From the following data, calculate the price of a 1.5-year semi-annual floating rate bond with 2%
spread:

▪ The price of a 6-month zero coupon bond is 98.

▪ The price of a 1-year semi-annual coupon bond with 3% coupon rate is 101.5.
▪ The forward discount factor F(0, 1, 1.5) is 0.99.
[Table 1] Forward discount factors (use this information to solve Q.4~Q.9 only)

T 0.50 1.00 1.50 2.00

F(0, T−0.5, T) 0.9800 0.9700 0.9500 0.9600

4. Using the forward discount factors in Table 1, calculate the discount factor Z(0, T) for each
maturity T=0.50, 1.00, 1.50, 2.00.

5. Using the forward discount factors in Table 1, calculate the semi-annually compounded
forward rate f2(0, T−0.5, T) for each maturity T=0.50, 1.00, 1.50, 2.00.

6. Using the forward discount factors in Table 1, calculate the duration of a portfolio which
contains the following securities:

▪ 1 unit of a 1.5-year semi-annual coupon bond with 4% coupon rate

▪ 2 units of a 2-year zero coupon bond
▪ 3 units of a 1-year semi-annual floating rate bond with zero spread

7. Using the forward discount factors in Table 1, calculate the convexity of a portfolio which
contains the following securities:

▪ 1 unit of a 2-year semi-annual coupon bond with 5% coupon rate

▪ 3 units of a 1-year zero coupon bond

8. Using the forward discount factors in Table 1, calculate the forward price to purchase six
months later a 1.5-year semi-annual coupon bond with 4% coupon rate.

9. Using the forward discount factors in Table 1, calculate the semi-annual swap rate for each
maturity T=0.50, 1.00, 1.50, 2.00.
10. Calculate the effective convexity of a MBS pass-through security with principal=$1,000,
WAM=4 months, WAC=12%, pass-through coupon rate=10%, and PSA=150%, assuming that the
PSA increases to 200% if the term structure shifts down by 100 basis points, while it decreases to
100% if the term structure shifts up by 100 basis points. Also, assume a flat term structure with a
constant continuously compounded 8% yield.