You observe the following term structure: Effective Annual YTM 1-year zero-coupon bond 8.1% 2-year zero-coupon bond 8.2 3-year zero-coupon bond 8.3 4-year zero-coupon bond 8.4 Required: If you believe that the term structure next year will be the same as today’s, calculate the return on (i) the 1-year zero and (ii) the 4-year zero. Which bond provides a greater expected 1-year return?
You observe the following term structure: Effective Annual YTM 1-year zero-coupon bond 8.1% 2-year zero-coupon bond 8.2 3-year zero-coupon bond 8.3 4-year zero-coupon bond 8.4 Required: If you believe that the term structure next year will be the same as today’s, calculate the return on (i) the 1-year zero and (ii) the 4-year zero. Which bond provides a greater expected 1-year return?
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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Question
You observe the following term structure:
| Effective Annual YTM | |
|---|---|
| 1-year zero-coupon bond | 8.1% |
| 2-year zero-coupon bond | 8.2 |
| 3-year zero-coupon bond | 8.3 |
| 4-year zero-coupon bond | 8.4 |
Required:
-
If you believe that the term structure next year will be the same as today’s, calculate the return on (i) the 1-year zero and (ii) the 4-year zero.
-
Which bond provides a greater expected 1-year return?
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