CAS Exam 9 Spring 2016, Question 10
Study guide: Exam 9
Given the following information:
| Bond | Par Value | Time To Maturity (years) | Annual Coupon Rate | Current Bond Price |
|---|---|---|---|---|
| 1 | $100 | 1 | 3% | $98.10 |
| 2 | $100 | 2 | 5% | $99.10 |
| 3 | $100 | 3 | 5% | X |
| 4 | $100 | 4 | 3% | $86.65 |
- The 1-year forward rate for year 4 is 10%.
- The liquidity premium in year 3 is 1%.
- Coupons are paid annually.
- Assume annual compounding.
Part a (1.5 points)
Calculate X.
Part b (0.75 points)
Calculate the price of bond 3 at time 2 under the expectations hypothesis theory. Assume the coupon has already been paid.
Part c (0.75 points)
Calculate the price of bond 3 at time 2 under the liquidity preference theory. Assume the coupon has already been paid.
No current syllabus covers this question; it is kept for the record.
Answer this question and see the worked solution