4. Pure expectations theory: Three-year bonds Juanita would like to invest a certain amount of money for three years and considers investing in a one-year bond that pays 4 percent. Juanit then like to buy a second one-year bond that is expected to pay the one-year forward rate one year from now, and finally a third one-year is expected to pay the one-year forward rate two years from now. (Hint: Assume that 2-year bonds and 3-year bonds both yield 9.000%.) If the annualized interest rate on a three-year bond is 9 percent, the forward rate of a one-year security beginning two years from now is percent.

4. Pure expectations theory: Three-year bonds Juanita would like to invest a certain amount of money for three years and considers investing in a one-year bond that pays 4 percent. Juanit then like to buy a second one-year bond that is expected to pay the one-year forward rate one year from now, and finally a third one-year is expected to pay the one-year forward rate two years from now. (Hint: Assume that 2-year bonds and 3-year bonds both yield 9.000%.) If the annualized interest rate on a three-year bond is 9 percent, the forward rate of a one-year security beginning two years from now is percent.

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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Consider a bond that promises the following cash ows. The required discount rate is 12%. Year 0 1 2 3 4 Promised Payments 160 170 180 230 You plan to buy this bond, hold it for 2.5 years, and then sell the bond. a.What total cash will you receive from the bond after the 2.5 years? Assume that periodic cash ows are reinvested at 12%. b.Assuming all market interest rates are 12%, what is the duration of this bond?
Over the next three years, the expected path of 1-year interest rates is 4, 1, and 1 percent. Today you buy $1 of one-year bond and when it matures you plan to use the money you receive to reinvest in one-year bond again. If the expectations theory of the term structure is true, then your expected rate of return for buying a two-year bond today is ______% (round to the neares integer)
A 1-year Treasury bond currently yields 6.0%, and a 2-year bond yields 7.0%. Mr. A, an investor who want to invest for a 2-year horizon is choosing between buying the 2-year security and hold it for 2 years and buy a 1-year security and hold it for 1 year and reinvest the proceeds in another 1-year security. Holding the pure expectation theory, what would be the rate of the 1-year rate 1 year from now so that options of Mr. A will be indifferent? 8% 6% 7% 6.5%
Suppose that you buy a two-year 7.3% bond at its face value. a-1. What will be your total nominal return over the two years if inflation is 2.3% in the first year and 4.3% in the second? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Nominal return a-2. What will be your real return? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Real return % % Real return Nominal return b. Now suppose that the bond is a TIPS. What will be your total 2-year real and nominal returns? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.) 1%
You have the choice between a convertible bond and a non-convertible bond for investment. Both offer you a coupon rate of 2.5% per year with semi-annual compounding. The remaining maturity for both bonds is 7.5 years. The price for the non-convertible bond is 99.7. Would you pay more or less for the convertible bond? Why?
Jeff is trying to forecast what the annual interest rate on a three-year bond will be two years from now, and he believes that the expectations hypothesis is the basis upon which he should build his forecast. Currently the rates of return on bonds of different maturities look like this: Maturity Rate 1-year 3.00% 2-year 3.50% 3-year 3.75% 4-year 4.00% 5-year 4.00% Based on the expectations hypothesis, what forecast should Jeff make for the return on a three-year bond, two years in the future?
3
You are considering the purchase of a perpetual bond that pays you $174 per year for the foreseeable future. If you require a 5.85% rate of return on this bond investment, what is a fair price for the bond that you would be willing to pay today? To nearest $0.01
please skip if you have already done this. thank you
Assume you can buy a bond that has a par value of $1000, matures in 10 years, yielding 6% and has a duration of 5. If you would like to use this bond to form a guaranteed investment contract “GIC” and offer a guaranteed rate of return to investors for certain years. a. what is the maximum yield you can offer? Why? Explain. b. For how many years would you make the guarantee? Explain.
Use your knowledge of bond pricing to explain under what circumstances you would be willing to pay the same price for a consol that pays $5 a year forever, and a 5 percent, 10-year coupon bond with a face value of $100 that only makes annual coupon payments for 10 years, at which point principal is returned. You would be willing to pay the same price for the bonds if: O the interest rate you use to discount future payments is lower than 5 percent, since that would ensure the 10-year bond would be worth the same as the consol. O you expect to only be around for another 10 years. the interest rate you use to discount future payments is 5 percent. While the consol makes coupon payments forever, the 10- year coupon bond pays back the principal at maturity. the interest rate you use to discount future payments is higher than 5 percent, since that would ensure the 10-year bond would be worth the same as the consol.
Please provide a detailed explanation and calculation

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