Reference no: EM133118761
The following is a list of prices for bonds of various maturities with a face value of £1000.
Maturity (years) 1, 2, 3, 4, 5 Price of the Bond (£) 995.36, 986.19, 977.42, 965.25, 953.56
a. Calculate the yields to maturity (YTM) of each bond and plot the term structure of interest rates. Discuss the shape of the term structure in terms of stylized facts.
b. Calculate the implied sequence of forward rates. What is the shape of the term structure of forward rates?
c. The Treasury plans to issue a 5-year coupon bond (with a face value of £1000), paying coupons once per year with a coupon rate of 1%. What will be the price of the coupon bond?
d. Calculate the 5-year swap rate for a swap that pays annually.
e. Calculate the duration of a 4-year coupon bond that pays a coupon of 2% per year.
f. Discuss to what extent incorporating convexity can help in hedging interest rate risk exposure of a portfolio.
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