Find the return on a 75-day investment in zero-coupon bonds if B(0, 1) = 0.89.
Question 2.35: Find the return on a 75-day investment in zero-coupon bonds ...
By solving the equation
(1 + r)^{−1} = 0.89
we find that r ≅ 0.1236, that is, the effective rate implied by the bond is about 12.36%. The price of the bond after 75 days will be
B(75/365, 1) = B(0, 1) (1 + r)^{\frac{75}{365} }=0.89 (1 + 0.1236)^{\frac{75}{365} }\cong 0.9115
and the return will be
K(0, 75/365) =\frac{B(75/365,1)-B(0,1)}{B(0,1)}\cong \frac{0.9115-0.89}{0.89} \cong 0.0242,
about 2.42%.
Related Answered Questions
The price of the bond as a function of the continu...
Because the bond is trading at par and the interes...
At time 0 we buy 1/B(0, 1) = e^{r }[/latex...
The continuous rate implied by the bond satisfies
...
The initial price of a six-month unit bond is [lat...
Since the bond is trading at par, its initial pric...
In Figure S.2 we can see that the bond price will ...
The time t price of the coupon bond in Examples 2....
a) If the continuous compounding rate is 8%, then ...
We solve the equation
100 = 95 (1 + r)^{\fr...