The yield curve for default-free zero-coupon bonds is currently as follows: Maturity (years) YTM 1 2 3 10.4% 11.4 12.4 Required: a. What are the implied one-year forward rates? (Do not round intermediate calculations. Round your answers to 2 decimal places.) Maturity (years) YTM Forward rate 1 10.4% 2 11.4% 12.41 % 3 12.4% 14.43 % b. Assume that the pure expectations hypothesis of the term structure is correct. If market expectations are accurate, what will the pure yield curve (that is, the yields to maturity on one- and two-year zero-coupon bonds) be next year? There will be a shift upwards in next year's curve. c. What will be the yield to maturity on two-year zeros? (Do not round intermediate calculations. Round your answers to 2 decimal places.) YTM % d. If you purchase a two-year zero-coupon bond now, what is the expected total rate of return over the next year? (Hint. Compute the current and expected future prices.) Ignore taxes. (Do not round intermediate calculations. Round your answer to 2 decimal places.) Expected total rate of return % e. If you purchase a three-year zero-coupon bond now, what is the expected total rate of return over the next year? (Hint. Compute the current and expected future prices.) Ignore taxes. (Do not round intermediate calculations. Round your answer to 2 decimal
The yield curve for default-free zero-coupon bonds is currently as follows: Maturity (years) YTM 1 2 3 10.4% 11.4 12.4 Required: a. What are the implied one-year forward rates? (Do not round intermediate calculations. Round your answers to 2 decimal places.) Maturity (years) YTM Forward rate 1 10.4% 2 11.4% 12.41 % 3 12.4% 14.43 % b. Assume that the pure expectations hypothesis of the term structure is correct. If market expectations are accurate, what will the pure yield curve (that is, the yields to maturity on one- and two-year zero-coupon bonds) be next year? There will be a shift upwards in next year's curve. c. What will be the yield to maturity on two-year zeros? (Do not round intermediate calculations. Round your answers to 2 decimal places.) YTM % d. If you purchase a two-year zero-coupon bond now, what is the expected total rate of return over the next year? (Hint. Compute the current and expected future prices.) Ignore taxes. (Do not round intermediate calculations. Round your answer to 2 decimal places.) Expected total rate of return % e. If you purchase a three-year zero-coupon bond now, what is the expected total rate of return over the next year? (Hint. Compute the current and expected future prices.) Ignore taxes. (Do not round intermediate calculations. Round your answer to 2 decimal
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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Transcribed Image Text:The yield curve for default-free zero-coupon bonds is currently as follows:
Maturity (years) YTM
1
2
3
10.4%
11.4
12.4
Required:
a. What are the implied one-year forward rates? (Do not round intermediate calculations. Round your answers to 2 decimal
places.)
Maturity (years)
YTM
Forward rate
1
10.4%
2
11.4%
12.41 %
3
12.4%
14.43 %
b. Assume that the pure expectations hypothesis of the term structure is correct. If market expectations are accurate, what will the
pure yield curve (that is, the yields to maturity on one- and two-year zero-coupon bonds) be next year?
There will be a shift upwards in next year's curve.
Transcribed Image Text:c. What will be the yield to maturity on two-year zeros? (Do not round intermediate calculations. Round your answers to 2 decimal
places.)
YTM
%
d. If you purchase a two-year zero-coupon bond now, what is the expected total rate of return over the next year? (Hint. Compute
the current and expected future prices.) Ignore taxes. (Do not round intermediate calculations. Round your answer to 2 decimal
places.)
Expected total rate of return
%
e. If you purchase a three-year zero-coupon bond now, what is the expected total rate of return over the next year? (Hint. Compute
the current and expected future prices.) Ignore taxes. (Do not round intermediate calculations. Round your answer to 2 decimal
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