3. Assume that the real risk-free rate, k*, is 3 percent and that inflation is expected to be 8 percent in Year 1,5 percent in Year 2, and 4 percent thereafter. Assume also that all Treasury bonds are highly liquid and free of default risk. If 2-year and 5-year Treasury bonds both yield 10 percent, what is the difference in the maturity risk premiums (MRPS) on the two bonds; that is, what is MRP5 minus MRP2?

3. Assume that the real risk-free rate, k*, is 3 percent and that inflation is expected to be 8 percent in Year 1,5 percent in Year 2, and 4 percent thereafter. Assume also that all Treasury bonds are highly liquid and free of default risk. If 2-year and 5-year Treasury bonds both yield 10 percent, what is the difference in the maturity risk premiums (MRPS) on the two bonds; that is, what is MRP5 minus MRP2?

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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14. Bond ABC has a current yield of 5% and Bond DEF has a current yield of 7%.If the market price of both bonds is similar, then the YTM on Bond DEF should be higher than the YTM on Bond ABC. Is this true or false? Why?
12. Suppose that you buy a 1-year maturity bond for $1,000 which is a real return bond with a coupon rate of 4%. What will the cash flow provided by the bond be for each of the four inflation rates? What will be the real and nominal rates of return on the bond in each scenario? (Do not round intermediate calculations. Round your answers to 2 decimal places.) a. The inflation rate is 2%. b. The inflation rate is 4%.
Assume all bonds have par or face value of 1,000
The real risk-free rate is 3 percent. Inflation is expected to average 2 percent a year for the next 3 years, after which the inflation is expected to average 3.5 percent a year. Assume that there is no maturity risk premium. A 7-year corporate bond has a yield of 7.6 percent. Assume that the liquidity premium on the corporate bond is 0.4 percent. What is the default risk premium on the corporate bond?
Refer to Table 10-2. a. Assume the interest rate in the market (yield to maturity) goes down to 8 percent for the 10 percent bonds. Using column 2, indicate what the bond price will be with a 10-year, a 20-year, and a 25-year time period. b. Assume the interest rate in the market (yield to maturity) goes up to 12 percent for the 10 percent bonds. Using column 3, indicate what the bond price will be with a 10-year, a 20-year, and a 25-year period. c. Assume the interest rate in the market (yield to maturity) goes down to 8 percent for the 10 percent bonds. If interest rates in the market are going down, which bond would you choose to own? multiple choice 1 10 Years 20 Years 25 Years d. Assume the interest rate in the market (yield to maturity) goes up to 12 percent for the 10 percent bonds. If interest rates in the market are going up, which bond would you choose to own? multiple choice 2 10 Years 20 Years 25 Years
Suppose you want to figure out the relationship between duration and maturity, so you consider the following three T-Bonds. You compute a. The duration of a two-year Treasury bond with a 10 percent semiannual coupon selling at par b. The duration of a three-year Treasury bond with a 10 percent semiannual coupon selling at par c. The duration of a four-year Treasury bond with a 10 percent semiannual coupon selling at par
The value of any financial asset is the present ✓ value of the cash flows the asset is expected to produce. For a bond with fixed annual coupons, its value is equal to the present value of all its annual interest payments and its maturity value as shown in the equation below: Bond's value = VB: Int. Int. (1+ra)² (1+ra)² N + ·+...+ Int. M + (1+ra)* (1+ra) Int. M (1+ra) (1+ra)N + We could use the valuation equation shown above to solve for a bond's value; however, it is more efficient to use a financial calculator. Simply enter N as years to maturity, I/YR as the going annual interest rate, PMT as the annual coupon payment (calculated as the annual coupon interest rate times the face value of the bond), and FV as the stated maturity value. Once those inputs are entered in your financial calculator, you can solve for PV, the value of the bond. Remember that the signs for PMT and FV should be the same, so PV will have an opposite sign. Typically, you would enter PMT and FV as positive…
Which of the following statements is the most accurate? 43. a. Long-term cash flows are riskier than short-term cash flows.Furthermore, a 20-year bond that is callable after 5 years would have a shorter projected duration, if not none at all, than a noncallable 20-year bond with equal maturity. As a result, if all other features are equal, investors can demand a lower rate of return on the callable bond than on the noncallable bond. b. A noncallable 20-year bond would have an average life that is equivalent to or better than a callable 20-year bond with otherwise similar characteristics. Furthermore, the longer a bond's lifespan, the higher the interest rate danger it poses to buyers. As a result, while all other factors remain stable, callable bonds subject borrowers to fewer interest rate risk than noncallable bonds. c. Both a and b are right statements. d. None of the above claims are true.
Which of the following bonds will have the larger price change (dollar value) for a 75- basis point change in yield? A. A $120 dollar bond with duration 2.25 B. A $70 dollar bond with duration 3.25 C. A $160 dollar bond with duration 1.75 D. A $200 dollar bond with duration 1.25 E. A $300 dollar bond with duration 0.75
Am. 397.

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