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i had typed these q’s yesterday dont know why i cant see now
in q 3 part b (ii) why do we take 715 at end of third year? why adding 329 at end of third year??
in part c of same question how to work out option swap? could you explain me the way u made us all understand interest rate option?
in q(4) why do we divide 109/104??
The question says that there is a swap of the principal immediately and in three years time, and that both are at todays spot rate – this is what the 715 is.
The agreement only covers the initial cost of $5,000. So when they receive $7500 at the end of three years, the extra $2500 has to be converted at the spot rate on 3 years time.
There is not an option swap! The questions asks you to compare using options with using a swap – they are two separate things.
In Q4. it is because the bond has a current market value of 104. It has a coupon rate of 9% and is redeemable in 1 years time, so in 1 year the receipt will be 100 + 9 = 109.
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