Suppose you can observe that 1-year bond interest rate is 4%, 2-year bond interest rate is 8%, and 3-year bond interest rate is 10% at time t. It is also known that the term premium on a 2-year bond is 1% and the term premium on a 3-year bond is 1.5%. a) What are the market's expected 1-year bond interest rates for the next two years from time t? b) How to interpret those expected short-term interest rates? (what would be the "possible" economic meanings in the expected short- term interest rates?) Discuss as least two "candidates" to explain them.

Suppose you can observe that 1-year bond interest rate is 4%, 2-year bond interest rate is 8%, and 3-year bond interest rate is 10% at time t. It is also known that the term premium on a 2-year bond is 1% and the term premium on a 3-year bond is 1.5%. a) What are the market's expected 1-year bond interest rates for the next two years from time t? b) How to interpret those expected short-term interest rates? (what would be the "possible" economic meanings in the expected short- term interest rates?) Discuss as least two "candidates" to explain them.

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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The outstanding bonds of Winter Tires Inc. provide a real rate of return of 3.2 percent. If the current rate of inflation is 2.1 percent, what is the actual nominal rate of return on these bonds?
Using the expectations hypothesis theory for the term structure of interest rates, determine the expected return for securities with maturities of two, three, and four years based on the following data. (Input your answers as a percent rounded to 2 decimal places.) 1-year T-bill at beginning of year 1 1-year T-bill at beginning of year 2 1-year T-bill at beginning of year 3 1-year T-bill at beginning of year 4 2-year security 3-year security 4-year security Expected Return Interest Rate 58 78 10% 128
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%
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.
Suppose the interest rate on a 1-year T-bond is 2.60% and that on a 2-year T-bond is 4.50%. Assume that the pure expectations theory is NOT valid, and the MRP is zero for a 1-year T-bond but 0.30% for a 2-year bond. What is the equilibrium market forecast for 1-year rates 1 year from now? a. 4.7333% b. 5.1110% c. 5.2676% d. 5.5463% e. 5.8250%. Only typing answer Please explain step by step
Suppose the interest rate on a 1-year government bond is 3.00%, on a 4-year government bond is 3.50% and that on a 6-year government bond is 4.90%. What is the market's forecast for 2-year rates 4 years from now, assuming the pure expectations theory is correct? Show your work.
Consider two zero coupon bonds. Both have face values of $100. Bond A pays its face value in 8 years, and Bond B pays its face in 2 years. If interest rates change from 9% to 7%, what is the percentage change in the long maturity bond's price minus the percentage change in the short maturity bond's price?
Using the expectations hypothesis theory for the term structure of interest rates, determine the expected return for securities with maturities of two, three, and four years based on the following data. Note: Input your answers as a percent rounded to 2 decimal places. 1-year T-bill at beginning of year 1 1-year T-bill at beginning of year 21 1-year T-bill at beginning of year 3 1-year T-bill at beginning of year 4 2-year security 3-year security 4-year security Expected Return % % % Interest Rate 7% 9% 10% 12%
The function s(t) = 0.16 − 0.04 e− t/4 provides the term structure of effective annual rates of zero coupon bonds of maturity t, with t in years. Find the following: (a) The effective annual rate of a 3 year zero coupon bond. (b) The 2-year forward effective annual rate for a one year period. (c) The forward effective annual rate for a one year period, 3 years forward. (d) The 3-year forward effective annual rate for a 3 month period. (e) The forward effective annual rate for a one day period, 3 years forward (the “overnight” rate).(Use 1/365 for a one-day period.)
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 a). Find the spot rates and draw a yield curve.b). Assume that there is a constant liquidty premium that is equal to 1% across all maturities. Find the forward rates and the expected one period future interest rates.
assume the interest rate on a 1-year t bond is currently 7% and the rate on a 2-year bond is 9%. If the maturity risk premium is .5% what is a reasonable forecast of the rate on a 1 year T bond next year. Round to 2 decimals places
Assume that the real risk free rate is 2% and the average expected inflation rate is 3% for each future year. The default risk premium and the liquidity premium for bond x are each 1% and the applicable Maturity Risk premium is 2% what is bond x’s interest rate. Round to 2 decimal places

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