question : treasury spot rates expressed as annual bond equivalent yields: MATURITY SPOT RATE 6 month ----- 3.0% 1 YEAR ------ 3.5 1.5 YEAR -----4.0 2 YEAR -------4.5 two notes : note 1 : face $1000, 4% semiannual coupon rate, price $991 note 2 : face 1000, 5% seniannual couple price $1008 answer note 1 correctly priced , notes 2 under priced i think i am wrong in caculate market rate … who can help me : i use 1.03*1.035*1.04*1.045 get anaul interest rate . not right ?
you have to discount each cash flow at the spot rates given. note 2 price = [25/1.015] + [25/1.0175^20] + [25/1.02^3] + [1025/1.0225^4] = 1010.05 there fore note 2 underpriced