The following information about bond prices are provided:

The following information about bond prices are provided:

Maturity (in years)

Coupon Rate (p.a. semi-annual compounding)

Bond Price

0.5

0

$99.50

1.0

4%

$102.50

1.5

8%

$109.00

2.0

4%

$100.00

(All bonds have a face value of $100. Coupon rates are expressed with semi-annual compounding)

Required:

(a)       Calculate the continuously compounded zero rates for the bonds above. Record your answers to 3 decimal places in percentage i.e. x.xxx% or 0.xxxxx.

(b)       What are the forward rates for the periods: 6 months to 12 months, 12 months to 18 months, 18 months to 24 months?

(c)       Use the zero rates you calculated from part (a) to estimate the price of a two-year bond providing a semi-annual coupon of 7% per annum and a face value of $100.

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