Assume today is mid-October 2010. You expect to borrow $1mil by issuing Bank Accepted Bill (BAB) for 90 days in mid-December 2010 (i.e. the borrowing period is between mid-December 2010 and mid-March 2011). Fearing that the BAB yield will move against you between now and mid-December 2010, you intend to lock in the borrowing rate by using the BAB futures. You will:
| A. |
Short the BAB futures today |
|
| B. |
Long BAB today |
|
| C. |
Long the BAB futures today |
|
| D. |
Short BAB today |
A step-up bond has a face value of $100 and 2 years to maturity. The annual coupon rate for the immediate next two coupons is 6% p.a. and the annual coupon rate for the final two coupons is 7% p.a. Coupons are paid semi-annually. The following table shows some relevant spot rates. What is the fair price of the bond? Choose the closest answer.
|
Year |
Spot rate |
|
0.5 |
5% p.a. |
|
1 |
5% p.a. |
|
1.5 |
5.3% p.a. |
|
2 |
5.5% p.a. |
| A. |
105.96 |
|
| B. |
108.11 |
|
| C. |
101.87 |
|
| D. |
100.04 |
