Assume semi-annual rates. 2-year rates are 4% and 10-year rates are 6%. You believe that interest rates for for 8 years beginning in 2 years will be 7%. What should you do? You think rates are going up. Should you buy a floating rate note, a 5-year fixed rate bond or a 10-year fixed rate bond? Does the shape of the yield curve affect your decision? You think rates are going down. Should you buy a floating rate note, a 10-year current coupon bond or a 10-year zero coupon bond? Does the shape of the yield curve affect your decision?

Assume semi-annual rates. 2-year rates are 4% and 10-year rates are 6%. You believe that interest rates for for 8 years beginning in 2 years will be 7%. What should you do? You think rates are going up. Should you buy a floating rate note, a 5-year fixed rate bond or a 10-year fixed rate bond? Does the shape of the yield curve affect your decision? You think rates are going down. Should you buy a floating rate note, a 10-year current coupon bond or a 10-year zero coupon bond? Does the shape of the yield curve affect your decision?

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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I need assistance with the following: Suppose you have bough the above zero-coupon bond, with value and duration equal to your obligation. Now suppose the rates immediately increase to 9%. What happens to your net position? How much is the tuition obligation? How much is the zero-coupon bond? How much is the net position?
Please write down the formulas you use and explain your calculations. Thank you
I need the answer as soon as possible
The pure expectations theory, or the expectations hypothesis, asserts that long-term interest rates can be used to estimate future short-term interest rates. Based on the pure expectations theory, is the following statement true or false? Q1. A certificate of deposit (CD) for two years will have the same yield as a CD for one year followed by an investment in another one-year CD after one year. a. True b. False Q2. The yield on a one-year Treasury security is 4.9200%, and the two-year Treasury security has a 5.9040% yield. Assuming that the pure expectations theory is correct, what is the market’s estimate of the one-year Treasury rate one year from now? (Note: Do not round your intermediate calculations.) a. 5.8627% b. 6.8973% c. 7.8629% d. 8.7596% Q3. Recall that on a one-year Treasury security the yield is 4.9200% and 5.9040% on a two-year Treasury security. Suppose the one-year security does not have a maturity risk premium, but the two-year security does and it is 0.2%. What is…
Suppose the risk-free interest rate is 4.6%. Having $600 today is equivalent to having what amount in one year? (Round to the nearestcent.) Having $600 in one year is equivalent to having what amount today? (Round to the nearestcent.) Which would you prefer, $600 today or $600 in one year? Does your answer depend on when you need the money? Why or why not? (Round to the nearestcent.)
How do I solve question e?
and the effective annual interest rate on a two-year zero coupon 6.4.5 The effective annual yield on a one-year zero coupon bond is 80, and the effective annual interest rate on a two-year zero coupon bond is 8.5%. You are able to arrange a one-year forward loan rate i for a one-year period. Suppose that under these conditions it is possible to make a riskless profit with the following strategy: (i) borrow amount 1 for one year at 8% effective annual, (ii) invest amount 1 for 2 years at 8.5% per year effective annual, (iii) arrange a one-year forward one-year length loan of amount 1.08 at rate i (starting one year from now) and repay the loan in (i), (iv) use the proceeds from (ii) to repay loan (iii) at the end of the second year. vai by For what full range of i will this strategy result in a positive amount left over after all 3 transactions are settled at the end of the second year?
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%
Suppose that the current rates on 60 and 120 day GICs are 5.50% and 5.75%, respectively. An investor is weighing the alternatives of purchasing a 120 day GIC versus purchasing a 60 day GIC and then reinvesting its maturity value in a second 60 day GIC.What would the interest rate on 60 day GICs have to be 60 days from now for the investor to end up in the same financial position with either alternative?
Suppose the interest rate on a 1-year government bond is 3.00%, on a 4-year government bond is 3.50% and that on a 6-year government bond is 4.90%. What is the market's forecast for 2-year rates 4 years from now, assuming the pure expectations theory is correct? Show your work.
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.
Suppose that you buy a TIPS (inflation-indexed) bond with a 1-year maturity and a coupon of 2% paid annually. Assume you buy the bond at its face value of $1,000, and the inflation rate is 10%. a. What will be your cash flow at the end of the year? (Do not round intermediate calculations. Round your answer to 2 decimal places.) b. What will be your real return? c. What will be your nominal return? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

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