The yield on a 1-year zero-coupon bonds is currently 7%; the YTM on 2 -year zeros is 8%. The treasury plans to issue a 2 -year maturity coupon bond, paying coupons once a year with a coupon rate of 9%. The face value of the bond is $100. (BKM 15.11) a) At what price will the bond sell? 15 p b) If the expectations theory of the yield curve is correct, what is the market expectation of the price that the bond will sell for next year? c) Recalculate your answer to b) if you believe in the liquidity preference theory and you believe the liquidity premium is 1%.

The yield on a 1-year zero-coupon bonds is currently 7%; the YTM on 2 -year zeros is 8%. The treasury plans to issue a 2 -year maturity coupon bond, paying coupons once a year with a coupon rate of 9%. The face value of the bond is $100. (BKM 15.11) a) At what price will the bond sell? 15 p b) If the expectations theory of the yield curve is correct, what is the market expectation of the price that the bond will sell for next year? c) Recalculate your answer to b) if you believe in the liquidity preference theory and you believe the liquidity premium is 1%.

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 yield curve currently observed in the market is as follows: y1 = 7%, Y2 = 8%, and yz = 9%. You are trying to decide between buying a two-year bond (Bond A) and three-year bond (Bond B), each of which is default-risk free and pays annual coupons of 8% per year. You strongly believe that yield curve in one year will become flat at 9%. Which one of the two bonds should you buy today if you plan to sell this bond in exactly one year (right after you receive the first coupon payment)? Assume interest is compounded annually, and each bond has a face value of $1,000. Bond B O Neither bond -- The expected total return of both bonds will be negative if interest rates increase to 9% in one year Bond A Both bonds provide the same return over a one year investment horizon A portfolio that invests 50% of your wealth in each bond provides the highest total expected return
Suppose you are given the following information about the default-free, coupon-paying yield curve: Maturity (years) 1 Coupon rate (annual payments) 0.00 YTM 2.000% 2 10.00 3.908% Show your work in Excel Solution. 3 6.00 5.840% 4 12.00 5.783% a. Use arbitrage to determine the yield to maturity of a two-year, zero- coupon bond. b. What is the zero-coupon yield curve for years 1 through 4?
Derive the probability distribution of the 1-year HPR on a 30-year U.S. Treasury bond with a 4.0% coupon if it is currently selling at par and the probability distribution of its yield to maturity a year from now is as shown in the table below. (Assume the entire 4.0% coupon is paid at the end of the year rather than every 6 months. Assume a par value of $100.) Note: Leave no cells blank - be certain to enter "0" wherever required. Negative values should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 2 decimal places. Economy Boom Normal Growth Recession Probability 0.25 0.50 0.25 YTM 10.0 % $ 9.0 % 8.0 % Capital Gain 43.44 $ (56.56) Price $ Coupon Interest 4.00 HPR (52.56) % % %
A treasury bond with $100 maturity face value has a $9 annual coupon, and 15 years left to maturity. What price will the bond sell for assuming that the 15 year yield to maturity in the market is 4%, 9%, and 14% respectively. Explain whether the price movements would have been greater or smaller if a 10 year bond had been used rather than a 15 year one.
Please show work without calc or excel. In other words the actual equation.
Derive the probability distribution of the 1-year HPR on a 30-year U.S. Treasury bond with a 3.0% coupon if it is currently selling at par and the probability distribution of its yield to maturity a year from now is as shown in the table below. (Assume the entire 3.0% coupon is paid at the end of the year rather than every 6 months. Assume a par value of $100.) Note: Leave no cells blank - be certain to enter "0" wherever required. Negative values should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 2 decimal places. Economy Boom Normal Growth Recession Probability 0.30 0.60 0.10 YTM 10.0% 8.0 % 7.0 % Price Capital Gain Coupon Interest HPR % % %
The bond J is a bond with a coupon rate of 4%. The bond K is a bond with a coupon rate of 10%. Both bonds have a maturity of 8 years, make semi - annual payments, and have a yield to maturity of 9%. If interest rates suddenly increase by 2%, what is the percentage change in the price of these bonds? And if the rates suddenly decrease by 2%? What does this problem teach you about the interest rate risk of low - coupon bonds?
A 5-year Treasury bond has a 4.9% yield. A 10-year Treasury bond yields 6.1%, and a 10-year corporate bond yields 8.5%. The market expects that inflation will average 1.7% over the next 10 years (IP10 = 1.7%). Assume that there is no maturity risk premium (MRP = 0) and that the annual real risk-free rate, r*, will remain constant over the next 10 years. (Hint: Remember that the default risk premium and the liquidity premium are zero for Treasury securities: DRP = LP = 0.) A 5-year corporate bond has the same default risk premium and liquidity premium as the 10-year corporate bond described. What is the yield on this 5-year corporate bond? Round your answer to one decimal place. %
Derive the probability distribution of the 1-year HPR on a 30-year U.S. Treasury bond with a 4.0% coupon if it is currently selling at par and the probability distribution of its yield to maturity a year from now is as shown in the table below. (Assume the entire 4.0% coupon is paid at the end of the year rather than every 6 months. Assume a par value of $100.) Note: Leave no cells blank - be certain to enter "0" wherever required. Negative values should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 2 decimal places. Economy Boom Normal Growth Recession Probability 0.35 0.40 0.25 YTM 11.0% 9.0 % 7.0 % Price Capital Gain Coupon Interest HPR % % %
Assume that the bond from problem #1 reaches maturity in 5 years instead of 15 years, with the same coupon rate and par value. What would the relevant market prices be at 10%, 5%, and 14% required market rates of return?
Please answer fast i give you upvote.
Consider a bond selling at par with a coupon rate of 6% and 10 years to maturity. The issuer makes semi-annual coupon payments. What is the price of this bond if the required yield is 15%? What if the yield is 16%? $563.34 for 15%, and $591.87 for 16% $541.25 for 15%, and $509.09 for 16% $509.09 for 15%, and $541.25 for 16% $525.41 for 15%, and $590.90 for 16%

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