[Fin562sp09] Questions

[Adam Gehr]

Yes, you are bootstrapping. From the first bond you will receive $1,040 
in one year. From the second bond you will receive $80 in one year and 
$1,080 in two years. You need to find the correct rate to discount 
one-year money and the correct rate to discount two-year money.

When you discount for FRAs you use money market arithmetic--i.e. simple 
interest. The denominator is 1 + (r*t).

         Adam Gehr

Darin Arnell wrote:
> Professor,
>  
> Could you please help me with the setup of problem 7 on the practice 
> exam?  We are bootstrapping, right?  I feel I am still getting 
> confused on this.
>  
> Also, question about FRAs - after you have found the amount you will 
> receive or pay, you have to discount it.  In the denominator, you have 
> to use time.  Is it 1+(r*t) or is it (1+r)^t.  Could you clarify this 
> for me?
>  
> Thanks,
> Darin
>
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