A plot of the yields on bonds with different terms to maturity but the same risk, liquidity, and tax considerations is known asA. an interest-rate curve.○ B. a risk-structure curve.OC. a yield curve.○ D. a term-structure curve.Suppose people expect the interest rate on one-year bonds for each of the next four years to be 4%, 6%, 6%, and 6%. If the expectationstheory of the term structure of interest rates is correct, then the implied interest rate on bonds with a maturity of four years is %. (Roundyour response to the nearest whole number).Refer to the figure on your right. Suppose the expected interest rates on one-year bonds for each of the next four years are 4%, 5%, 6%,and 7%, respectively.1.) Use the line drawing tool (once) to plot the yield curve generated.2.) Use the point drawing tool to locate the interest rates on the next four years.Carefully follow the instructions above, and only draw the required objects.Interest RateTerm to Maturity in YearsQ

The yield curve shows the curve that yields at different maturity terms. The bond's interest rates…

Answered: A plot of the yields on bonds with…

Principles of Economics (MindTap Course List)

8th Edition

ISBN:9781305585126

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter27: The Basic Tools Of Finance

Section: Chapter Questions

Problem 3PA

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In a country Macroland, the government borrows at 5% for 1-year maturity. However, the Central Bank has announced interest rate hikes for the following years, so people expect that the next year the same 1-year bond will pay 7% and that the interest will rise again to 8% in the year after. Compute and draw the yields curve (for 1, 2 and 3 years bonds) of the government of Macroland, assuming that there is no risk of default and no inflation
a, b, c
Determinants of Interest Rate for Individual Securities A particular security's default risk premium is 3.10 percent. For all securities, the inflation risk premium is 2.10 percent and the real interest rate is 2.30 percent. The security's liquidity risk premium is .80 percent and maturity risk premium is 1.00 percent. The security has no special covenants. What is the security's equilibrium rate of return?
1. Suppose that people expect the one-year interest rate will equal 1% forever. a. Consider a ten-year zero coupon (discount) bond with a face value of $1000. The bond has a current price of $910. Is the term premium positive or negative? b. Redo question (a), assuming that the bond has a current price of $900. c. Using FRED, plot the behavior of the term premium on a 10-year zero coupon bond over the past 25 years in the US.
The demand ? (in billions of £) for a bond with coupon rate 5% and face value ?? = 1000, and two years to maturity as a function of its price ? is ? = 4000 − 2?. The supply in (billions of £)asafunctionofthepriceofthebondis ? = 2?+ 400. There is a business cycle expansion, so both supply and demand shifts. After the shift, the new demand curve is given by: ?=4000+?−2? ,whereas the new supply curve is ?=2? + 200. For which values of ? will the interest increase/decrease? Which values of ? are in line with empirical data?
Bond A pays $8,000 in 20 years. Bond B pays $8,000in 40 years. (To keep things simple, assume that theseare zero-coupon bonds, meaning the $8,000 is theonly payment the bondholder receives.)a. If the interest rate is 3.5 percent, what is the valueof each bond today? Which bond is worth more?Why? (Hint: You can use a calculator, but the ruleof 70 should make the calculation easy.)b. If the interest rate increases to 7 percent, what isthe value of each bond? Which bond has a largerpercentage change in value?c. Based on the example above, complete the twoblanks in this sentence: “The value of a bond[rises/falls] when the interest rate increases,and bonds with a longer time to maturity are[more/less] sensitive to changes in the interestrate.”
Assume that the economy can experience high growth, normal growth, or recession. Under these conditions, you expect the following stock market returns for the coming year: State of the Economy High Growth Normal Growth Recession Probability 0.2 0.7 0.1 a. Compute the expected value of a $1,000 investment over the coming year. If you invest $1,000 today, how much money do you expect to have next year? What is the percentage expected rate of return? Return 45% 20% - 4% Instructions: Enter dollar values rounded to the nearest whole dollar and percentages rounded to one decimal place. The expected value is $ and the expected rate of return is b. Compute the standard deviation of the percentage return over the coming year. Standard deviation = = % % %. c. If the risk-free return is 7 percent, what is the risk premium for a stock market investment? Risk premium
2. Assume a bond with the following characteristics: face value = $1000; maturity = 5 years; N yearly coupon payments = $100. a. If the current price of this bond is $850, state what the formula is to calculate the bond's yield to maturity and state the range of interest rates where the yield to maturity should fall b. If you purchased this bond at face value and held it for 1 year, when you resold it for $850, what is the bond's rate of return?
A plot of the yields on bonds with different terms to maturity but the same risk, liquidity, and tax considerations is known as A. a term-structure curve. B. an interest-rate curve. C. a yield curve. D. a risk-structure curve. Suppose people expect the interest rate on one-year bonds for each of the next four years to be 4%, 4%, 5%, and 8%. If the expectations theory of the term structure of interest rates is correct, then the implied interest rate on bonds with a maturity of four years is %. (Round your response to the nearest whole number). Refer to the figure on your right. Suppose the expected interest rates on one-year bonds for each of the next four years are 4%, 5%, 6%, and 7%, respectively. 1.) Use the line drawing tool (once) to plot the yield curve generated. 2.) Use the point drawing tool to locate the interest rates on the next four years. Carefully follow the instructions above, and only draw the required objects. Interest Rate 1 2- 6- 2 3 Term to Maturity in Years 5 ♫
Interest rate spread Suppose that a 5-year Treasury bond pays an annual rate of return of 2.9%, and a 5-year bond of the fictional company Risky Investment Inc. pays an annual rate of return of 7.3%. The risk premium on the Risky Investment bond is __________ percentage points. Consider an increase in the annual rate of return on the Risky Investment bond from 7.3 percent to 8.9 percent. Such a change would __________(NARROW/WIDEN) the interest rate spread on the Risky Investment bond over Treasuries to __________ . Which of the following explains the increase in the annual rate of return on the Risky Investment bond? a. The expected default rate on the Risky Investment bond has decreased. b. The expected default rate on the Treasury bond has increased. c. The expected default rate on the Treasury bond has decreased. d.The expected default rate on the Risky Investment bond has increased. NOTE- This is one question but it is divided into…
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