Question 1

−0.1∗10
y 10=0.09−0.03 e =0.07896
−0.1∗11
y 11 =0.09−0.03 e =0.08001
t +r
( 1+ y t +r )
r
using the formula , ( 1+ f t ,r ) = t
( 1+ y t )
Here r=1 since its a1 year forward rate ä 2 ā an∨¿¿
11
( 1+ y 11 ) 0.08001
1+ f 10= 10
= =1.0906∨9.06 %
( 1+ y 10) 0.07896

Question 2

1=c
[ 1
+
1
+
1
+
1
]
1.06 1.06∗1.065 (1.06 ) (1.065 )( 1.07 ) ( 1.06 ) ( 1.065 ) ( 1.07 )
=¿ c=0.06478 %

Question 3

5.65 ( 100+5.65 )
100= + , ( 1)
1+ y 1 ( 1+ y 2)
2

7 101+7
103.40= + ,(2 )
1+ y 1 ( 1+ y 2 )2

solving equation 1∧2 for y 1∧ y 2

2
¿ eq . ( 1 )=¿ ( 1+ y 2 ) =
[ ( )]
100−
5.65
1+ y 1
∗1

105.65

2
¿ eq . ( 2 ) =¿ ( 1+ y 2 ) =
[ 103.40−
( )]
7
1+ y 1
∗1

108
y 1=4.14 %

y 2=5.69 %

Question 4
97=6∗a 3∨¿+103 v @ i¿ 3

GRY =8.0584 %

(ii) One year spot rate = 97=109∗ ( )1

1+ y 1
, y1 =12.371%
Question 5
GRY is similar ¿ spot rates for zero coupon bond

y 1=6 %
2
( 1+ y 2 ) =1.06∗1.05=¿ , y 2=5.499 %
3
(( 1+ y 3 ) =1.06∗1.05∗1.04=¿ y 3=4.997 %
4
( 1+ y 4 ) =1..06∗1.05∗1.04∗1.03=¿ y 4=4.494 %
(ii) P=4 [ 1.05−1+1.055499−2+ 1.04997−3 ] +114∗1.04494− 4=106.441

106.441=4 a 4∨¿+110 v ¿ 4

by trial∧error , gry∨i=4.54 %

Question 6
2 3
PV of this stock=10 v +10 v +110 v
' 2 3 4
Differentiatng this equation gives=¿ P =−10 v −20 v −330 v
P = 20v^3 + 60v^4 +1320v^5

P −( −10 v −20 v −330 v )

' 2 3 4
267.01
Volatality=¿− ❑ = 2 3
@0.08 %= =2.54
P 10 v +10 v +110 v 105.15

(ii) DMT =2.54∗1.08=2.74

P” ( 20 v +60 v +1320 v )
3 4 5
iii) Convexity=¿ = 2 3
=9.11
p 10 v +10 v +110 v
Question 7
Ia 20∨.
DMT =
(i) 63.9205
a20∨¿= =7.51 ¿
8.5136

[ (∑ ) ]
20
t −1 t
(ii) t∗1000∗1.1 ∗v ¿
1
DMT = =¿
¿
t−1 t −1
if i=1.1 , 1.1 v =1
DMT =¿
We have used the following formula for the above the expression
n

∑ k= 12 ∗n∗( n+1 )
k =1

(iii) For continuous annuity we have the following dmt

20 20

∫ t∗1000 v dt ∫ t∗v t dt
t

0
20
= 0 20 =¿ ¿
∫ 1000∗v dt
t
∫ v dt t

0 0
Question 8
Company has the following liabilties

At t=5 ,2000 ( 10−5 )=10000

At t=6 , 2000 (10−5 )=8000

At t=7 , 2000 ( 10−5 )=6000

At t=8 , 2000 ( 10−5 )=4000

At t=9 , 2000 (10−5 )=2000

Present Value of all these liabilties is as follows

5 6 7 8 9
P V l=10000 v +8000 v +6000 v + 4000 v +2000 v @6 %
−5 −6 −7 −8 −9
P V l=10000 ¿ 1.06 + 8000∗1.06 +6000∗1.06 + 4000∗1.06 +2000∗1.06 =20,796

(ii) Let A denote the amount invested in Bond A and B denote the amount invested in
B
P V A= A +B

Since P V A =PV L , as per the reddingtons rule , so A+ B=20,796

5 6 7 8 9
5∗10000 v +6∗8000 v +7∗6000 v +8∗4000 v + 9∗2000 v
DM T L = =6.245
20796

P=5 a 100
15∨¿+100 v 15 = ( 5∗9.7122 ) + =90.288 ¿
1.0615

A
So an investment of A∈Bond A buys lots of 100 nominal
90. 288

({[ 90.288
A
)( 1∗5 v +2∗5 v +… ..+15∗5 v + 15∗100 v )]+ 5 B }
2 15 15

DM T A=
PV A¿
¿
DM T A=¿ ¿

10.657 A+5 B
DM T A=
PV A

10.657 A+5 B=129,865