Today’s zero-rate curve is summarized in the table below.
Time period (years) Zero rate %pa
0.5 5.755
1.0 6.250
1.5 6.455
2 6.555
2.5 6.600
3 6.610
Calculate the price (per $100 par value), to three decimal places, of a three-year fixed-coupon bond paying a coupon rate of 9% pa if the bond pays coupons every half year. Assume that the bond is default-free and that a coupon has just been paid -- that is, price the bond on an ex-interest basis.
Hint: find the bond price as the present value of its future cash flows, using the discount factors retrieved from the zero-rate curve that we discussed in class.