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Consider an exotic fixed income security with 1 year remaining to maturity. On maturity, the security holder will receive $100 face value. Coupons are paid quarterly to the security holder according to the 3-month LIBOR rate. In addition, on maturity and only on maturity, the exotic security holder will have to pay a variable interest that equals to the 4-month LIBOR rate.
The following table shows the current LIBOR continuously compounded rate with different maturities:
Maturity
LIBOR
1
5.0% p.a.
7
5.5% p.a.
2
5.1% p.a.
8
3
5.2% p.a.
9
5.6% p.a.
4
5.3% p.a.
10
5.7% p.a.
5
5.3% p,a.
11
5.8% p.a.
6
5.4% p.a.
12
5.9% p.a
For example, the 1-mth LIBOR is 5.0% p.a. compounded continuously. You can treat the LIBOR rates presented in table above as the discount rates/spot rates with different maturities.
Required: What is the current price of the exotic fixed income security? Show all of your workings.
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