Reference no: EM133056740

Consider a semi-annual coupon bond. Its face value is $1,000, it bears a 6 percent coupon rate per year, and will mature in 2 years. (Note: You must show all the steps on how to obtain the values or your attempt will be penalized.)

Maturity	Spot Rates	Forward Rates
0.5	0.9	f1= f(0,0.5)
1.0	1.3	f2 = f(0.5,1)
1.5	1.8	f3 = f(1,1.5)
2.0	2.3	f4 = f(1.5, 2)

1) Calculate the respective implied forward rates from the corresponding spot rates.  

2) Calculate the bond price using the implied forward rates using the following equation.

3)  Suppose that the CIR model generates the following binomial interest tree (forward rates) lattice. Calculate the bond price using the backward induction method.

t=1	t=2	t=3	t=4
0.90	2.2	4.9	8.7
	1.8	2.8	5.0
		1.6	2.9
			1.7

4) Check whether the bond price from 3) is the same as the bond price from 2).