Download Bond Pricing Project 1

Financial Engineering Project Course
Summer 2002
Project 1
Due: Friday, May 31
In this project you will write a Java class that incorporates some of the important characteristics of a fixedrate bond. Your Java class will provide two instance methods:
/* Construct a fixed-rate bond object */
public FixedRateBond(double principal, double lifeInYearsRemaining
double couponInterestRatePerYear, double numCouponsPerYear)
/* return the theoretical price of this bond */
public double priceOf()
Your Java class will provide a main routine that will create a Bond object with the following values:
Principal = 100 Million
Life in years = 2
Coupon = 6% per annum
Coupons paid semiannually
Your priceOf() method will compute the theoretical price of the bond. According to Hull, “the theoretical
price of a bond can be calculated as the present value of the cash flows received by the owner of the bond
using the appropriate zero-coupon interest rates as discount rates”.
The price of the bond can be computed as the sum
n
Bfix =( Σ k * e-riti ) + (L * e-rntn)
i=1
where k is the fixed coupon payment, ti is the time until the ith payment is received ( 1 <= i<= n), ri is the
LIBOR zero rate for a maturity at ti, L is the principal.
In order to compute this sum, you will need a table of LIBOR zero rates to compute the values for r i.
Write an additional Java class called CurrentLIBORRateTable that can be used to represent a table of
current LIBOR rates. The LIBOR rate table will associate a particular month with a particular LIBOR rate
(with continuous compounding). For example, if the LIBOR rate table associates month 3 with a LIBOR
rate of 4.2% then the call CurrentLIBORRateTable.getRate(3) would return 4.2. The private data within
this class will be organized as follows:
private static double values[] = { 0.05, 0.058, 0.064, 0.068 };
private static int months[] = {
6,
12,
18, 24 };
So, in our example, the theoretical price of the bond will be
3e-0.05 * 0.5 + 3e-0.058 * 1.0 + 3e-0.064 * 1..5 + 103e
-0.068*2.0
= 98.39
Turn in a printout of your documented solution. Comments must include your name, assignment number
and a description of each member of your class. Also attach printouts of your DOS screen when the main
routine is run.