Question 4 Consider a 5-year coupon government bond. This bond has a 5% coupon rate,...
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Question 4 Consider a 5-year coupon government bond. This bond has a 5% coupon rate, a par value of 100 and the coupon payment frequency is annual. The bond is priced at 111.0865 with a 2.61% yield. + a) Determine if this 5-year coupon government bond is expensive or cheap relative to the spot rate curve presented in table 2.4 b) How would you take advantage of this investment opportunity? You must explain your answer clearly. Table 2. Zero-coupon government bond prices and implied spot rates Maturity in years Maturity value Zero-Coupon Bond Price 99.50254 1 100 Implied Spot Rate 0.5% 1.0% 1.5% 1 2 100% 98.02962 32 100% 95.63172 ku 42 100 92.38454 2.0% 2.5% 52 1002 88.38542 (Note: The implied spot rates in table 2 have been calculated using the annual coupon payment frequency assumption.)
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