Suppose that the current one-year rate (one-year spot rate) and expected one-year government bondsover years 2, 3 and 4 are as follows:1R₁ = 4.80%, E(2r₁) = 5.45%, E(3r₁) = 5.95%, E(41) = 6.10%Assume that there are no liquidity premiums. To the nearest basis point, what is the current rate for thefour-year-maturity government bond?A. 5.57%B. 5.62%C. 5.83%D. 6.10%

Given: 1R1 = 4.80%, E(2r1) = 5.45%, E(3r1) = 5.95%, E(4r1) = 6.10%

Suppose that the current one-year rate (one-year spot rate) and expected one-year government bonds over years 2, 3 and 4 are as follows: 1R1 = 4.80%, E(2r1) = 5.45%, E(3r1) = 5.95%, E(4r1) = 6.10% Assume that there are no liquidity premiums. To the nearest basis point, what is the current rate for the four-year-maturity government bond? A. 5.57% B. 5.62% C. 5.83% D. 6.10%

Suppose that the current one-year rate (one-year spot rate) and expected one-year government bonds over years 2, 3 and 4 are as follows: 1R1 = 4.80%, E(2r1) = 5.45%, E(3r1) = 5.95%, E(4r1) = 6.10% Assume that there are no liquidity premiums. To the nearest basis point, what is the current rate for the four-year-maturity government bond? A. 5.57% B. 5.62% C. 5.83% D. 6.10%

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 situation where zero rates, measured with continuous compounding, are as in the below table. Suppose that a two-year bond with a principal of $100 provides coupons at the rate of 8% per annum semiannually. What is the theoretical price of the bond. Maturity (years) Zero rate (%) with continuous compounding 0.5 5 1.0 6 1.5 7 2.0 8 $99.60 $99.25 $99.02 $99.89
Suppose you are provided with the following table of spot rates of different maturity bonds: Year Spot rate 1 8 2 9 3 7 4 8 5 10 Calculate, respectively, one period forward rates of these bonds for year 2, year 3 and year 4.
Using the following information, determine the default risk premium on the 10 year AA corporate bond: Rate % inflation 0.80 T-bill 5.00 10y T-Bond 6.00 10y AAA Corporate 6.48 10y AA Corporate 7.03 note: your answer should be to 2 decimal places. So, if your answer is 3.253%, for example, then enter 3.25 without the percent sign.
Suppose that the current one-year rate (one-year spot rate) and expected one-year government bonds over years 2, 3 and 4 are as follows: 1R1 = 4.80%, E(2r1) = 5.45%, E(3r1) = 5.95%, E(4r1) = 6.10% Assume that there are no liquidity premiums. To the nearest basis point, what is the current rate for the four-year-maturity government bond? 5.57% 5.62% 5.83% 6.10%
4. Given the expectations theory as the correct interpretation of the term structure, calculate and depict the yield curves for the provided series of one-year interest rates: 5%, 7%, 7%, 7%, 7% 5%, 4%, 4%, 4%, 4% a. b. How would your yield curves change if people preferred shorter-term bonds over longer- term bonds? Solution:
Assume that the real, risk-free rate of interest is expected to be constant over time at 3 percent, and that the annual yield on a 6-year corporate bond is 8.00 percent, while the annual yield on a 10-year corporate bond is 7.75 percent: you may assume that the default risk and liquidity premium are the same for both bonds. Also assume that the maturity risk premium for all securities can be estimated as MRP, (0.1%) *(t-1), where t is the number of periods until maturity. Finally assume that inflation is expected to be constant at 3 percent for Years 1-6, and then constant at some rate for Years 7-10 (4 years). Given this information, determine what the market must anticipate the average annual rate of inflation will be for Years 7-10. 2.583% O 1979% 2.281% 1.375 % O 1.677 % 4
The following table summarizes prices of various default-free zero-coupon bonds ( $100 face value): Maturity (years) 1 2 3 4 5 {:[" Price (per "$100],[" face value) "]:} $96.33 $91.98 $87.41 $82.53 $77.41 a. Compute the yield to maturity for each bond. b. Plot the zero-coupon yield curve (for the first five years). c. Is the yield curve upward-sloping, downward-sloping, or flat? Note: Assume annual compounding. a. Compute the yield to maturity for each bond. The yield on the 1-year bond is %. (Round to two decimal places.) The yield on the 2-year bond is %. (Round to two decimal places.) The yield on the 3-year bond is %. (Round to two decimal places.) The yield on the 4-year bond is enter your response here%. (Round to two decimal places.) Part 5 The yield on the 5-year bond is enter your response here%. (Round to two decimal places.) Note:- Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care of plagiarism. Answer completely. You will…
Consider the following: Price Yield to maturity Periods to maturity Modified duration Fixed-rate Bond Fixed-rate Note 107.18 5.00% 18 6.9848 100.00 5.00% 8 3.5851 a. For an increase in interest rates of 100 basis points, determine the change in value for the fixed-rate note. Show your work. b. For an increase in interest rates of 100 basis points, determine the change in value for the fixed-rate bond. Show your work. c. Which of the two fixed-rate securities are more sensitive to increases interest rates? Why? d. What would be the most appropriate course of action to take given interest rates are expected to rise? Explain carefully.
5-year Treasury bonds yield 8.0%. The inflation premium (IP) is 2.66%, and the maturity risk premium (MRP) on 5-year T-bonds is 0.56%. There is no liquidity premium on these bonds. What is the real risk-free rate, r*? r as a percent and round your answer to two decimal places)
A recent edition of The Wall Street Journal reported interest rates of 11.25 percent, 11.60 percent, 11.98 percent, and 12.25 percent for 3-, 4-, 5-, and 6-year Treasury security yields, respectively. According to the unbiased expectation theory of the term structure of interest rates, what are the expected 1-year forward rates for years 4, 5, and 6? (Do not round intermediate calculations. Round your answers to 2 decimal places.) Years Forward Rates 4 5 6 %
5-year Treasury bonds yield 3.6%. The inflation premium (IP) is 1.9%, and the maturity risk premium (MRP) on 5-year T-bonds is 0.5%. There is no liquidity premium on these bonds. What is the real risk-free rate, r*?
The outstanding bonds of CEPS Group provide a nominal yield to maturity of 7.19 percent. The real rate of return is 3.71 percent. What is the rate of inflation?

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