Chapter 15, Problem 17PS

a.

Summary Introduction

To calculate: The implied 1-year forward rate for default free zero coupon bonds.

Introduction:

Implied forward rate: Normally we come across a difference of amount between the spot interest rates and the forward interest rate. This difference can be termed as implied forward rate. Implied forward rate helps the investors to compare the returns across investments.

b.

Summary Introduction

To calculate: The yield to maturity on 1-year zero-coupon bonds next year, assuming that pure expectations hypothesis of the term structure is correct.

Introduction:

Yield to maturity: Whenever an investment is made by the investor, he/she is entitled to earn return for holding the security or bonds till it matures. When this return is calculated in percentages, it is called yield to maturity.

c.

Summary Introduction

To calculate: The yield on 2-year zeros.

Introduction:

Zero-coupon bond: It is a type of bond where the face value of the bond is repaid at the time of maturity. In simple words, since no periodic interest payments or coupon payments are made on bonds, it is termed as zero-coupon bond.

d.

Summary Introduction

To calculate: The expected total rate of return over next year if a 2-year zero coupon bond is purchased now.

Introduction:

Total return: It is supposed to be the rate of return on investment for a given period.  It includes capital gains, dividends, interest and distributed realized earnings for a given period.

e.

Summary Introduction

To calculate: The expected total rate of return over the next 3-year zero coupon bond.

Introduction:

Total return: It is supposed to be the rate of return on investment for a given period.  It includes capital gains, dividends, interest and distributed realized earnings for a given period.

f.

Summary Introduction

To calculate: The current price of a 3-year maturity bond with 12% coupon rate which is paid annually.

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.

g.

Summary Introduction

To calculate: The total expected rate of return over the next year.

Introduction:

Expected rate of return: When an investment is made, the investor expects or anticipates some return. The rate at which this anticipated or expected returns are earned is called expected rate of return. It is also called as anticipated rate of return.