Trading

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Submitted By paperdell
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Interest Rate | | Year 1 | Year2 | Year3 | Low | | 8% | 14% | Middle | 4% | 10% | 16% | High | | 12% | 18% |
Trading Case B02A

The spot interest rate is known with certainty, while in year 2 and year 3, there are three possible interest rates. This creates scenarios of interest rates; 9 scenarios in year 1 and year2, and 3 scenarios in year 3. As a result, there are ranges of possible fair value for the bonds. | Year 1 | Year 2 | Year 3 | 1 | 4% | 8% | 14% | 2 | 4% | 8% | 16% | 3 | 4% | 8% | 18% | 4 | 4% | 10% | 14% | 5 | 4% | 10% | 16% | 6 | 4% | 10% | 18% | 7 | 4% | 12% | 14% | 8 | 4% | 12% | 16% | 9 | 4% | 12% | 18% |

| Year 1 | Year 2 | Year 3 | 1 | | 8% | 14% | 2 | | 8% | 16% | 3 | | 8% | 18% | 4 | | 10% | 14% | 5 | | 10% | 16% | 6 | | 10% | 18% | 7 | | 12% | 14% | 8 | | 12% | 16% | 9 | | 12% | 18% |

| Year 1 | Year 2 | Year 3 | 1 | | | 14% | 2 | | | 16% | 3 | | | 18% |

| Cp Bond | Zero C1 | Zero C2 | Zero C3 | MIN | 98.232 | | 85.852 | 72.756 | MAX | 104.426 | | 89.031 | 78.098 | AVG | 101.285 | 96.154 | 87.432 | 75.387 |

At the beginning of year 1 , Zero C1 would matured and no longer tradable. For the other three bonds, we have private information which enables us to cut out an interest rate, lefting with 6 scenarios. TRADE AT BEG YEAR 1 (interest not LOW) | | Cp Bond | Zero C1 | Zero C2 | Zero C3 | MIN | 92.161 | | 89.286 | 75.666 | MAX | 96.810 | | 90.909 | 79.745 | AVG | 94.464 | | 90.097 | 77.686 |

TRADE AT BEG YEAR 1 (interest notMIDDLE) | | Cp Bond | Zero C1 | Zero C2 | Zero C3 | MIN | 92.161 | | 89.286 | 75.666 | MAX | 98.603 | | 92.593 | 81.222 | AVG | 95.346 | | 90.939 | 78.411 |

TRADE AT BEG YEAR 1 (interest not HIGH) | | Cp Bond | Zero C1 | Zero C2 | Zero C3 | MIN | 93.837 | |…...

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