Bonds and the Yield Curve, 25%):
Given the following term structure for the continuously compounded interest rate
Time (years) 0.5 1 1.5 2 2.5 3
rc 3.6% 4.0% 4.2% 4.4% 4.5% 4.6%
3a) Derive the equivalent term structure for annually compounded interest rate and compute,
with both types of compounding, the term structure of forward rates.
3b) With both compounding schemes evaluate the present value of a 3 year bond with
principal of 100 units paying semi-annual coupon with (annual) coupon rate of 6%. Verify
the agreement between the two prices obtained with the two compounding schemes.
3c) Compute the current yield, the yield to maturity, and the par yield of the bond

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