QUESTION 5Consider the effect of an un-anticipated 1 basis point increase in the 5 year bond rate (xt) at timet, which persists at t+1, t+2, ... . Assuming the 2 year bond rate (zt) does notchange, and no other shocks occur at any horizon, what is the most appropriate inference regarding the change in the 10 year bond rate (yt) in the long run (i.e., infinite horizon)?O a. The 10 year bond rate increases by 1.34 in the long-run.O D. The long-run change in the 10 year bond rate is between 1.2263 and 1.4537 with 95% confidence.O C. The 10 year bond rate is not significantly affected by the increase in the 5 year bond rate.O d. The effect cannot be computed because the data is not stationary.

Consider the effect of an un-anticipated 1 basis point increase in the 5 year bond rate (x+) at time t, which persists at t+1, t+2,... Assuming the 2 year bond rate (z+) does not change, and no other shocks occur at any horizon, what is the most appropriate inference regarding the change in the 10 year bond rate (y+) in the long run (i.e., infinite horizon)? O a. The 10 year bond rate increases by 1.34 in the long-run. O b. The long-run change in the 10 year bond rate is between 1.2263 and 1.4537 with 95% confidence. O C. The 10 year bond rate is not significantly affected by the increase in the 5 year bond rate. Od. The effect cannot be computed because the data is not stationary.

Consider the effect of an un-anticipated 1 basis point increase in the 5 year bond rate (x+) at time t, which persists at t+1, t+2,... Assuming the 2 year bond rate (z+) does not change, and no other shocks occur at any horizon, what is the most appropriate inference regarding the change in the 10 year bond rate (y+) in the long run (i.e., infinite horizon)? O a. The 10 year bond rate increases by 1.34 in the long-run. O b. The long-run change in the 10 year bond rate is between 1.2263 and 1.4537 with 95% confidence. O C. The 10 year bond rate is not significantly affected by the increase in the 5 year bond rate. Od. The effect cannot be computed because the data is not stationary.

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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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.)
The following data are gathered for:· The real risk-free rate is 1.25%· Inflation premium is constant at 2.50%· Default risk premium is 5%· Liquidity risk premium is 0.50% What is the quoted rate on a short-term government security?
When all else is equal, interest rate risk is smaller with: a) a longer original maturity. b) a shorter remaining maturity. c)a longer remaining maturity d) a shorter original maturity.
as interest rates change does rhe nominal yield of the new issues match the rate? conversely does the current yield on outstanding binds change according to these new rates (premium or discount)?
Assuming a mild preference for shorter-term bonds, the liquidity premium theory suggests that a flat yield curve is an indication of: A) constant short-term interest rates in the near and further future. B) a slight rise in short-term interest rates in the near future and a slight decline in the further future. C) constant short-term interest rates in the near future and a slight decline in the further future. D) a slight decline in short-term interest rates in the near and further future. Support your answer using a numerical example and explain carefully all the assumptions you make.
1. Assume the following information about a Treasury zero-coupon yield curve today: Maturity (years) Zero rates (%) Maturity (years) Zero rates (%) 1 2.30 6 3.50 2.70 7. 3.80 3. 2.90 8 4.00 4 3.10 9 4.20 3.20 10 4.30 All rates above are with continuous compounding. a. Calculate the corresponding rates under semi-annual compounding. b. Calculate the price of a 4-year Treasury bond with face value $1,000 that pays coupon annually at the coupon rate of 4%. c. If the government wants to issue a 5-year bond that pays coupon annually and priced at par (face value $1,000), what should be the amount of each coupon payment?
Consider a bond selling at par with modified duration of 10.6 years and convexity of 210. A 2% decrease in yield would cause the price to increase by 21.2%, according to the duration rule. What would be the percentage price change according to the duration-with-convexity rule? O [A] 21.2% O [B] 25.4% O [C] 17.0% O [D] 10.6%
Recall that on a one-year Treasury security the yield is 5.6100% and 6.7320% 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 0.15%. What is the market’s estimate of the one-year Treasury rate one year from now? (Note: Do not round your intermediate calculations.) a 9.6049% b 6.4285% c 8.6217% d 7.5629% Suppose the yield on a two-year Treasury security is 5.83%, and the yield on a five-year Treasury security is 6.20%. Assuming that the pure expectations theory is correct, what is the market’s estimate of the three-year Treasury rate two years from now? (Note: Do not round your intermediate calculations.) a 5.46% b 6.45% c 6.53% d 6.61%
What is the interest if $200 is borrowed for 24 months at 10% simple interest? Interest = $
Recall that on a one-year Treasury security the yield is 4.0000% and 5.4000% 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 0.4%. What is the market’s estimate of the one-year Treasury rate one year from now? (Note: Do not round your intermediate calculations.) 6.8509% 6.0096% 7.6322% 5.1082%
Which of the following statements is the most accurate? 43. a. Long-term cash flows are riskier than short-term cash flows.Furthermore, a 20-year bond that is callable after 5 years would have a shorter projected duration, if not none at all, than a noncallable 20-year bond with equal maturity. As a result, if all other features are equal, investors can demand a lower rate of return on the callable bond than on the noncallable bond. b. A noncallable 20-year bond would have an average life that is equivalent to or better than a callable 20-year bond with otherwise similar characteristics. Furthermore, the longer a bond's lifespan, the higher the interest rate danger it poses to buyers. As a result, while all other factors remain stable, callable bonds subject borrowers to fewer interest rate risk than noncallable bonds. c. Both a and b are right statements. d. None of the above claims are true.
A4)

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