Suppose the current one-year interest rate is 3%. Also assume that financial markets expect the one-year interest rate next year to be 4%, and expect the one-year rate to be 5% the year after that. Given this information, the yield to maturity on a three-year bond will be approximately O A. 15% O B, 5% C. 6% OD. 12% O E. 4%

Suppose the current one-year interest rate is 3%. Also assume that financial markets expect the one-year interest rate next year to be 4%, and expect the one-year rate to be 5% the year after that. Given this information, the yield to maturity on a three-year bond will be approximately O A. 15% O B, 5% C. 6% OD. 12% O E. 4%

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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2. Consider a 2-year bond whose par value is $1,000 and coupon rate is 4% per year, payable semi-annually. The bond's current price is such that its yield to maturity is 5% p.a., semi- annual compounding. Suppose that the yield increases by 0.1% (i.e., from 5% p.a. to 5.10% p.a.). Using the concept of duration, what do you estimate the new bond price to be? What is the actual new bond price?
Use the following information to answer the questions. Bond A Bond B Face Value 1000 1000 Coupon rate 10% 8% Coupons paid out Semi-annually Quarterly Years to maturity 4 4 Bond price 800 ? Suppose bond A and B have the same YTM. What is the yield to maturity of bond A? What is the price of bond B? What is the current yield of bond B? What is the EAR (effective annual rate) of these two bonds?
5) The following table contains data to calculate forward rates using pure expectations theory. a) Find the yield on a 20 year bond, 10 years forward (10f 20). b) Find the yield on a 5 year bond, 2 years forward (2r5). Maturity Yield 1 year 4.73% 2 years 4.375% 3 years 4.25% 5 years 4.125% 7 years 4.00% 10 years 2.75% 20 years 3.375% 30 years 3.00% ง
Assume that the real interest rate is 2% per year, the default risk premium is 3%, the liquidity premium is 1%, and the maturity risk premium is 2%. Additionally, expected inflation is 2% next year, 5% the year after, and 3% from then on. What is the nominal interest rate over a 10-year period?
Suppose the face value of a bond which matures in seven years is $5,000, and pays a coupon of $75. Suppose the bond was purchased at a price of $2,000, and the price is estimated to be constant the entire time until maturity. What will be the rate of return on the bond? 40% 4% .0375% 3.75%
Suppose 2-year Treasury bonds yield 5% while 1-year bonds yield 3%. Real risk-free rate is 2.5% and the maturity risk premium is zero. Using the expectations theory, what is the yield on a 1-year bond one year from now? Calculate the yield using a geometric average. 7.04% 9.54% 4.5% 5.5%
Suppose that the term structure of interest rates is: t 0.5 1 1.5 2 r 1% 1.2% 1.4% 1.8% Interest rates are annual interest rates that are semi-annually compounded. 1. Calculate the price and modified duration of a 1-year bond with a 6% coupon rate, with coupons paid semi-annually. The bond has a face value of 100.0 2. Calculate the price and modified duration of a 2-year bond with a 10% coupon rate, with coupons paid semi-annually. The bond has a face value of 100.0 3. Compare your results from 1 and 2 above. Which bond is more sensitive to changes in interest rates?
Suppose the yield on a bond that pays $100 in one year is currently 2%. If interest rates suddenly spike so that newly issued similar 1 year $100 bonds yield 4%, the price of the original bond will fall from 98.04 to 96.15.
The term structure for zero-coupon bonds is currently: Maturity (Years) YTM (%) 1 4.6% 5.6 6.6 2 3 Next year at this time, you expect it to be: Maturity (Years) 2 YTM (%) 5.6% 6.6 7.6 Required: a. What do you expect the rate of return to be over the coming year on a 3-year zero-coupon bond? b. Under the expectations theory, what yields to maturity does the market expect to observe on 1- and 2-year zeros at the end of the year? c. Is the market's expectation of the return on the 3-year bond greater or less than yours? Complete this question by entering your answers in the tabs below. Required A Required B Required C Under the expectations theory, what yields to maturity does the market expect to observe on 1- and 2-year zeros at the end of the year? Note: Round your answers to 2 decimal places. Maturity 1 2 YTM % %
Consider two bonds x and y, both with face value 100, coupon rate 10%, and maturity of 1 year. Assume that the interest rate is 10%. Assume that bond y will go into default on both the principal and interest payments with a probability of 50%. Suppose that prices equal the expected discounted payments. What is the difference in the yields to maturity? (a) The yields to maturity are the same. (b) 110. (c) 120. (d) 10. (e) 12.
1. Consider two bonds with a similar credit rating and pay the same coupon rate per annum. The terms to maturity for Bond A and Bond B are 5 years and 10 years respectively. If inflation rate is expected to increase in the near future and therefore leads to an increase in interest rate, what is the effect on the bond prices? Which bond is likely to experience a larger effect due to the increase in interest rate? Briefly explain your answer.
A 10-year bon have an interest rate of 6.50%, while a 15-year bond have an interest rate of 6.0%. Holding the expectation theory, what does the market believe will be the interest rate on a 5-year bond, 10 years from today? 5.00% 5.60% 6.35% 12.50%

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