Consider the following data for bonds A and B: _price annual cash flows t = 0 t = 1 t = 2 t = 3 A $990 $100 $1,100 В $900 $50 $50 $1,050 Initially assuming a flat yield curve of 10% and the expectations theory of the term structure holds, as such the price of bond A is $1,000 and the price of bond B is $875.65. If you kept everything the same, except for replacing the assumption of the expectations theory with the assumption а. of a liquidity premium theory, calculate the new two-year and three-year spot rates? One-year spot rate is 10%. Assume a liquidity premium of 20 basis points for two-year spot rates and 40 basis points for 3 year spot rates.
Consider the following data for bonds A and B: _price annual cash flows t = 0 t = 1 t = 2 t = 3 A $990 $100 $1,100 В $900 $50 $50 $1,050 Initially assuming a flat yield curve of 10% and the expectations theory of the term structure holds, as such the price of bond A is $1,000 and the price of bond B is $875.65. If you kept everything the same, except for replacing the assumption of the expectations theory with the assumption а. of a liquidity premium theory, calculate the new two-year and three-year spot rates? One-year spot rate is 10%. Assume a liquidity premium of 20 basis points for two-year spot rates and 40 basis points for 3 year spot rates.
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:Consider the following data for bonds A and B:
_price
annual cash flows
t = 0
t = 1
t = 2
t = 3
A
$990
$100
$1,100
В
$900
$50
$50
$1,050
Initially assuming a flat yield curve of 10% and the expectations theory of the term structure holds, as such the price of bond A is
$1,000 and the price of bond B is $875.65.
If you kept everything the same, except for replacing the assumption of the expectations theory with the assumption
a.
of a liquidity premium theory, calculate the new two-year and three-year spot rates? One-year spot rate is 10%. Assume a liquidity
premium of 20 basis points for two-year spot rates and 40 basis points for 3 year spot rates.
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