Current price of the exotic fixed income security

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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

Maturity

LIBOR

1

5.0% p.a.

7

5.5% p.a.

2

5.1% p.a.

8

5.5% p.a.

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.

Reference no: EM133056986

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