Chapter 15, Problem 11PS

a.

Summary Introduction

To calculate: The Selling price of the bond.

Introduction:

Bond price: It is supposed to be the present value of a bond derived after discounting the future cash flows that are expected to be generated by a bond. It is also referred as selling price of the bond.

b.

Summary Introduction

To calculate: The yield to maturity on the bond

Introduction:

Yield to maturity: In short it is represented as YTM. YTM is supposed to be the total return which is expected from a bond when the bond is held till the maturity date.

c.

Summary Introduction

To calculate: The market expectations of selling price if the expectation theory yield curve is correct, on which the bond will be sold next year.

Introduction:

Expectations theory: Expectation theory deals with prediction of the value of short-term interest rates in future will the help of long-term interest rates prevailing on current date.

d.

Summary Introduction

To calculate: The market expectations of selling price of the bond during next year using liquidity preference theory and assuming liquidity premium 1%.

Introduction:

Expectations theory: Expectation theory deals with prediction of the value of short-term interest rates in future will the help of long-term interest rates prevailing on current date.