Consider the following pure discount bonds with face value $1,000: Maturity Price 1 952.38 2 898.47 3 847.62 4 799.64 5 754.38 Suppose now that the current one-period interest rate is 5% and that the markets expects future one period interest rates to decline by %0.5 per year. (a). Assume first that the liquidity premium is constant at 1%. Draw a graph with the spot yield curve, the forward rates curve and a curve showing expected future one-period interest rates. (b). Assume next that the liquidity premium increases by 0.5% per year from initially being 1%. Draw a graph with the spot yield curve, the forward rates curve and a curve showing expected future one-period interest rates.
Consider the following pure discount bonds with face value $1,000: Maturity Price 1 952.38 2 898.47 3 847.62 4 799.64 5 754.38 Suppose now that the current one-period interest rate is 5% and that the markets expects future one period interest rates to decline by %0.5 per year. (a). Assume first that the liquidity premium is constant at 1%. Draw a graph with the spot yield curve, the forward rates curve and a curve showing expected future one-period interest rates. (b). Assume next that the liquidity premium increases by 0.5% per year from initially being 1%. Draw a graph with the spot yield curve, the forward rates curve and a curve showing expected future one-period interest 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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Consider the following pure discount bonds with face value $1,000:
| Maturity | Price |
| 1 | 952.38 |
| 2 | 898.47 |
| 3 | 847.62 |
| 4 | 799.64 |
| 5 | 754.38 |
Suppose now that the current one-period interest rate is 5% and that the markets expects future one period interest rates to decline by %0.5 per year.
(a). Assume first that the liquidity premium is constant at 1%. Draw a graph with the spot yield curve, the forward rates curve and a curve showing expected future one-period interest rates.
(b). Assume next that the liquidity premium increases by 0.5% per year from initially being 1%. Draw a graph with the spot yield curve, the forward rates curve and a curve showing expected future one-period interest rates.
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