a. What do you expect the rate of return to be over the coming year on a 3-year zero-coupon bond? (Round your answer to 1 decimal place.) b-1. Under the expectations theory, what yields to maturity does the market expect to observe on 1- and 2-year zeros at the end of the year? (Round your answers to 2 decimal places.) b-2. Is the market's expectation of the return on the 3-year bond greater or less than yours? A. Greater B. Less
Debenture Valuation
A debenture is a private and long-term debt instrument issued by financial, non-financial institutions, governments, or corporations. A debenture is classified as a type of bond, where the instrument carries a fixed rate of interest, commonly known as the ‘coupon rate.’ Debentures are documented in an indenture, clearly specifying the type of debenture, the rate and method of interest computation, and maturity date.
Note Valuation
It is the process to determine the value or worth of an asset, liability, debt of the company. It can be determined by many processes or techniques. Many factors can impact the valuation of an asset, liability, or the company, like:
The term structure for zero-coupon bonds is currently:
| Maturity (Years) | YTM (%) | |
| 1 | 4.5 | % |
| 2 | 5.5 | |
| 3 | 6.5 | |
Next year at this time, you expect it to be:
| Maturity (Years) | YTM (%) | |
| 1 | 5.5 | % |
| 2 | 6.5 | |
| 3 | 7.5 | |
a. What do you expect the
b-1. Under the expectations theory, what yields to maturity does the market expect to observe on 1- and 2-year zeros at the end of the year? (Round your answers to 2 decimal places.)
b-2. Is the market's expectation of the return on the 3-year bond greater or less than yours?
Trending now
This is a popular solution!
Step by step
Solved in 2 steps
