Assume the pure expectation theory holds: If thereturn on 6 years maturity treasury bill (TB) is 8%, thereturn on 1-year maturity TB is 6%, the return on a 2years maturity (TB) is 7%, X is the return on a 3-yearmaturity bond.a. Calculate X, the forward rate, the return on a3-year maturity bond, 3 years from today.b.Graph the yield curvec. Based on the yield curve you just derived, whatare your expectations of the future performance of theeconomy?

Rate of return for different maturities have been given. Based on the information, we have derive…

Assume the pure expectation theory holds: If the return on 6 years maturity treasury bill (TB) is 8%, the return on 1-year maturity TB is 6%, the return on a 2 years maturity (TB) is 7%, X is the return on a 3-year maturity bond. Calculate X, the forward rate, the return on a 3-year maturity bond, 3 years from today. b. Graph the yield curve c. Based on the yield curve you just derived, what are your expectations of the future performance of the economy?

Assume the pure expectation theory holds: If the return on 6 years maturity treasury bill (TB) is 8%, the return on 1-year maturity TB is 6%, the return on a 2 years maturity (TB) is 7%, X is the return on a 3-year maturity bond. Calculate X, the forward rate, the return on a 3-year maturity bond, 3 years from today. b. Graph the yield curve c. Based on the yield curve you just derived, what are your expectations of the future performance of the economy?

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 two bonds x and y, both with face value 100, coupon rate 10%, and maturity of 1 year. Assume that the interest rate is 10%. Assume that bond y will go into default on both the principal and interest payments with a probability of 50%. Suppose that prices equal the expected discounted payments. What is the difference in the yields to maturity? (a) The yields to maturity are the same. (b) 110. (c) 120. (d) 10. (e) 12.
The pure rate of return is 1.5%. Inflation is expected to be 2% this year and 3% during the next two years. Assume that the maturity risk premium for 2 and 3 years security are 1.2% and 1.3% respectively. What is the yield on 2 year Treasury Securities? Group of answer choices 5.47% 5.20% 5.37% 5.30% Please show the steps.
You are given the following information about the yield curve: the 1-, and 2-year yields are yl = 4.5% and y2 = 5.5%, respectively. A 2-year annual 5% coupon bond with a face value of $1,000 is currently selling for $1,000. Assume the first coupon will not be paid until one year from now. Is there an arbitrage opportunity and, if so, how would you exploit it (assume we cannot trade in fractions of a penny)? A. There is no arbitrage opportunity B. Yes: Buy the bond and fund this by shorting a $50 face value 1-year discount bond and a $1,050 face value 2-year discount bond C Yes: Buy the bond and fund this by shorting a $47.85 face value 1-year discount bond and a $943.38 face value 2-year discount bond D. Yes: Short the bond and buy a $50 face value 1-year discount bond and a $1,050 face value 2-year discount bond E. Yes: Short the bond and buy a $47.85 face value 1-vear discount bond and a $943.38 face value 2-year discount bond
You own a bond with an annual coupon rate of 5% maturing in two years and priced at 85%. Suppose that there is a 23% chance that at maturity the bond will default and you will receive only 45% of the promised payment. Assume a face value of $1,000.A. What is the bond’s promised yield to maturity?B. What is its expected yield (i.e., the possible yields weighted by their probabilities)
The yield curve currently observed in the market is as follows: y1 = 7%, Y2 = 8%, and yz = 9%. You are trying to decide between buying a two-year bond (Bond A) and three-year bond (Bond B), each of which is default-risk free and pays annual coupons of 8% per year. You strongly believe that yield curve in one year will become flat at 9%. Which one of the two bonds should you buy today if you plan to sell this bond in exactly one year (right after you receive the first coupon payment)? Assume interest is compounded annually, and each bond has a face value of $1,000. Bond B O Neither bond -- The expected total return of both bonds will be negative if interest rates increase to 9% in one year Bond A Both bonds provide the same return over a one year investment horizon A portfolio that invests 50% of your wealth in each bond provides the highest total expected return
Suppose the 1 - year spot rate is 0.8%, and that a 2 - year 1.5% annual coupon, a 3 - year 2% annual coupon bonds are trading at par ($100). Calibrate a 2-year binomial interest rate model, assuming that interest rate volatility is 10%. What is the lowest rate at t = 2? Assume annual compounding. Round your answer to 4 decimal places. For example if your answer is 3.205%, then please write down 0.0321.
The real risk-free rate is 2.70%, inflation is expected to be 3.45% this year, and the maturity risk premium is zero. Ignoring any cross-product terms, i.e., if averaging is required, use the arithmetic average, what is the equilibrium rate of return on a 1-year Treasury bond? Please explain process and show calculations
Suppose that =7% (na1), and that future short term (1 year) interest rates are expected to be 5% and 3% (for the subsequent two years). The liquidity premium for n2 and 3 is 0.25% and 0.35% respectively. a. Use the liquidity premium theory to calculate for ne2 and 3, and then plot the yield curve using your results. CALCULATE showing all work and ALL formulas that you use, b. Discuss what would be the impact on the yield curve in part a. if future short term rates were suddenly expected to rise.
Quantitative Problem: Today, interest rates on 1-year T-bonds yield 1.7%, interest rates on 2-year T-bonds yield 2.3%, and interest rates on 3-year T-bonds yield 3.3%. a. If the pure expectations theory is correct, what is the yield ofb 1-year T-bonds one year from now? Be sure to use a geometric average in your calculations. Do not round intermediate calculations. Round your answer to four decimal places. b. If the pure expectations theory is correct, what is the yield on 2-year T-bonds one year from now? Be sure to use a geometric average in your calculations. Do not round intermediate calculations. Round your answer to four decimal places. c. If the pure expectations theory is correct, what is the yield on 1-year T-bonds two years from now? Be sure to use a geometric average in your calculations. Do not round intermediate calculations. Round your answer to four decimal places.
1) Explain the concept of interest rate risk in bond investment 2) show a numerical example of it by calculating % changes in price for 1 year and 3-year annual coupon bonds. Assume coupon interest rate = 12%, Yield to Maturity = 6%, Face value= 100. Use 2% increase in YTM (i.e., 6% → 8%).
b. Suppose you are considering two possible investment opportunities: a 12-year Treasury bond and a 7-year, AA-rated corporate band. The current real risk-free rate is 5%, and inflation is expected to be 2% for the next 2 years, 3% for the following 4 years, and 4% thereafter. The maturity risk premium is estimated by this formula: MRP = 0.03 (t-1) %. The liquidity premium (LP) for the corporate bond is estimated to be 0.2%. You may determine the default risk premium (DRP), given the company's bond rating, from the following table. Remember to subtract the bond's LP from the corporate spread given in the table to arrive at the bond's DRP. Rate 0.83% 1.03 1.35 1.73 Corporate Bond Yield Spread = DRP + LP U.S. Treasury AAA corporate 0.20% AA corporate 0.52 A corporate 0.90 What yield would you predict for each of these two investments? Round your answers to three decimal places, 12-year Treasury yield: 7-year Corporate yield: % %
Suppose the real risk-free rate of interest is r*=4%�*=4% and it is expected to remain constant over time. Inflation is expected to be 1.60% per year for the next two years and 3.90% per year for the next three years. The maturity risk premium is 0.1×(t−1)%0.1×�−1%, where t� is number of years to maturity, a liquidity premium is 0.45%, and the default risk premium for a corporate bond is 1.40%. The average inflation during the first 4 years is2.37% . What is the yield on a 4-year Treasury bond? 4.30% 8.90% 6.75% 7.05% What is the yield on a 4-year BBB-rated bond? 8.90% 7.50% 7.05% 8.45% If the yield on a 5–year Treasury bond is 7.38% and the yield on a 6–year Treasury bond is 7.83%, the expected inflation in 6 years is . (Hint: Do not round intermediate calculations.)

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