Chapter 15, Problem 16PS

A

Summary Introduction

To calculate: The yield to maturity of 2 year zero bond.

Introduction: The zero-coupon bonds are those bonds that are bought by the investors below the face value of the bond. These bonds are free from the payment of the interest for the whole life.   

B

Summary Introduction

To calculate: The yield to maturity of the 2 year coupon bond.

Introduction: Zero-coupon bonds are those bonds that are free from the interest payments. Yield to maturity is defined as the return of the investment after the maturity period. The bond is bought at the market price by the investor.     

C

Summary Introduction

To calculate: The forward rate for the second year.

Introduction: The forward rate is similar to the interest rate at which futures trading are done. In this, the commodity is bought or sold at a forward rate but in the future date. For example, interest rates are given in loan payment if there is obligation.   

D

Summary Introduction

To calculate: The expected price of the bond at the end of 1^st year and holding period return on the coupon bond, as per the expectations hypothesis.

Introduction: The expected bond price is the price of the bond after the maturity period. This price is defined by the coupon price and call price. Holding period return is the net return given by the bond after the completion of the maturity period.

E

Summary Introduction

To explain: The condition of high and low return value in liquidity preference hypothesis.

Introduction: The return value is the final payment of the investment after the completion of time. The value is high for the long term security and low for the short term investment. When we take liquidity into consideration, a high value gives by the upward yield curve.