The University of Melbourne

Centre for Actuarial Studies

Department of Economics
Financial Mathematics II
Mid-term Semester 2
2016

Preamble
Time allowed: 45 − x minutes
Reading time: x minutes, you choose x ≥ 0
Total number of pages: 2
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Student Number
Calculator Make (e.g. Casio, Sharp)
Calculator Model (e.g. EL-533)

Questions
Question 1. The following forward rates expressed as per annum convertible
half yearly rates are observed in the market.

Start time End Time Rate

0 0.5 2.5%
0.5 1.0 2.8%
1.0 1.5 3.1%
1.5 2.0 3.2%

A bond with $1 million principal and maturity 1.5 years is to be issued

immediately. It will pay a coupon six monthly. Find the coupon rate that
will make the bond be at par. Express the answer as a per annum convertible
half yearly rate correct to one basis point. What is the value of the bond at
issue?
3 marks

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Question 2. Five thousand dollars were invested on June 1 2001 until Septem-
ber 1 2014. The average monthly return was 0.3%. The standard deviation
of monthly returns was 0.10. Estimate the fund’s worth at the end.

2 marks

Question 3. A non-dividend paying stock, S, is worth $ 3.50 today.

• What is meant by a call option on the stock S?

• What is meant by a put option on the stock S?

The following prices of puts on S and zero-coupon bonds (ZCBs) are known
Type Strike Expiry Value
Put 3 0.25 0.007657
Put 4 0.25 0.497564
Put 3 0.5 0.027665
Put 4 0.5 0.515611
ZCB N/A 0.25 0.995012
ZCB N/A 0.5 0.990049
Find the price of a call option on S struck at 4 with expiry 0.5.
4 marks

Question 4. A perpetual bond pays coupons every six months. The coupon
rate is 3% per annum convertible half yearly. It has principal $50,000 and
has just paid a coupon. If the yield is 4% convertible half yearly, what is
the bond’s price correct to one cent?

1 mark

End of Examination

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