The yield curve for default-free zero-coupon bonds is currently as follows: Maturity (years) 1 2 3 YTM 9.8% 10.8 11.8 Required: a. What are the implied one-year forward rates? (Do not round intermediate calculations. Round your answers to 2 decimal places.) Maturity (years) YTM Forward rate 9.8% 2 3 10.8% 11.8% % % b. Assume that the pure expectations hypothesis of the term structure is correct. If market expectations are accurate, what will the pure yield curve (that is, the yields to maturity on one- and two-year zero-coupon bonds) be next year? O There will be a shift upwards in next year's curve. O There will be a shift downwards in next year's curve. O There will be no change in next year's curve. c. What will be the yield to maturity on two-year zeros? (Do not round intermediate calculations. Round your answers to 2 decimal places.) YTM % d. If you purchase a two-year zero-coupon bond now, what is the expected total rate of return over the next year? (Hint Compute the current and expected future prices.) Ignore taxes. (Do not round intermediate calculations. Round your answer to 2 decimal places.) Expected total rate of return %

The yield curve for default-free zero-coupon bonds is currently as follows: Maturity (years) 1 2 3 YTM 9.8% 10.8 11.8 Required: a. What are the implied one-year forward rates? (Do not round intermediate calculations. Round your answers to 2 decimal places.) Maturity (years) YTM Forward rate 9.8% 2 3 10.8% 11.8% % % b. Assume that the pure expectations hypothesis of the term structure is correct. If market expectations are accurate, what will the pure yield curve (that is, the yields to maturity on one- and two-year zero-coupon bonds) be next year? O There will be a shift upwards in next year's curve. O There will be a shift downwards in next year's curve. O There will be no change in next year's curve. c. What will be the yield to maturity on two-year zeros? (Do not round intermediate calculations. Round your answers to 2 decimal places.) YTM % d. If you purchase a two-year zero-coupon bond now, what is the expected total rate of return over the next year? (Hint Compute the current and expected future prices.) Ignore taxes. (Do not round intermediate calculations. Round your answer to 2 decimal places.) Expected total rate of return %

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter4: Bond Valuation

Section: Chapter Questions

Problem 19P

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Question

The yield curve for default-free zero-coupon bonds is currently as follows:
Maturity (years)
YTM
1
9.8%
2
10.8
3
11.8
Required:
a. What are the implied one-year forward rates? (Do not round intermediate calculations. Round your answers to 2 decimal places.)
Maturity (years)
YTM
Forward rate
1
9.8%
2
3
10.8%
11.8%
%
%
b. Assume that the pure expectations hypothesis of the term structure is correct. If market expectations are accurate, what will the pure
yield curve (that is, the yields to maturity on one- and two-year zero-coupon bonds) be next year?
O There will be a shift upwards in next year's curve.
O There will be a shift downwards in next year's curve.
O There will be no change in next year's curve.
c. What will be the yield to maturity on two-year zeros? (Do not round intermediate calculations. Round your answers to 2 decimal
places.)
YTM
%
d. If you purchase a two-year zero-coupon bond now, what is the expected total rate of return over the next year? (Hint: Compute the
current and expected future prices.) Ignore taxes. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Expected total rate of return
%

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