Currently, the term structure is as follows: One-year bonds yield 11.00%, two-year zero-coupon bonds yield 12.00%, three-year and longer maturity zero-coupon bonds all yield 13.00%. You are choosing between one, two, and three-year maturity bonds all paying annual coupons of 12.00%. You strongly believe that at year-end the yield curve will be flat at 13.00%. Required: a. Calculate the one year total rate of return for the three bonds. (Do not round intermediate calculations. Round your answers to 2 decimal places.) One year total rate of return Answer is not complete. One Year % Two Years % Three Years %

Currently, the term structure is as follows: One-year bonds yield 11.00%, two-year zero-coupon bonds yield 12.00%, three-year and longer maturity zero-coupon bonds all yield 13.00%. You are choosing between one, two, and three-year maturity bonds all paying annual coupons of 12.00%. You strongly believe that at year-end the yield curve will be flat at 13.00%. Required: a. Calculate the one year total rate of return for the three bonds. (Do not round intermediate calculations. Round your answers to 2 decimal places.) One year total rate of return Answer is not complete. One Year % Two Years % Three Years %

EBK CFIN

6th Edition

ISBN:9781337671743

Author:BESLEY

Publisher:BESLEY

Chapter5: The Cost Of Money (interest Rates)

Section: Chapter Questions

Problem 20PROB

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Subject:- Finance Currently, the term structure is as follows: One-year bonds yield 9%, two-year bonds yield 10%, three-year bonds and greater maturity bonds all yield 11%. You are choosing between one-, two-, and three-year maturity bonds all paying annual coupons of 10%, once a year. Which bond should you buy if you strongly believe that at year-end the yield curve will be flat at 11%?
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?
12. Suppose that 1-year bonds currently offer a nominal yield to maturity of 4% (1,0 = 0.04), otherwise comparable 2-year bonds currently offer a yield to maturity of 4.5% (12,0 = 0.045), and 3 year bonds currently offer a yield to maturity of 4.8% (13,0 = 0.048). a. Draw the current yield curve. b. Based on the Expectations Theory of Term Structure, what yield to maturity do investors expect next year's 1 year bonds to earn (i.e. - what is it,1)? c. What do investors expect the yield to be on 1 year bonds in two years (11,2 = ?)? d. What do investors expect the yield to be on 2 year bonds next year (i2,1 =?)?
You observe the following term structure: Effective Annual YTM 1-year zero-coupon bond 2-year zero-coupon bond 3-year zero-coupon bond 4-year zero-coupon bond 8.1% 8.2 8.3 8.4 a. 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 (1i) the 4-year zero. (Do not round intermediate calculations. Round your answers to 1 decimal place.) One year return on 1-year bond One year return on 4-year bonds % % b. Which bond provides a greater expected 1-year return? O 1-year zero-coupon bond O 4-year zero-coupon bond
Quantitative Problem: Today, interest rates on 1-year T-bonds yield 1.7%, interest rates on 2-year T-bonds yield 2.5%, and interest rates on 3-year T-bonds yield 3.4%. a. If the pure expectations theory is correct, what is the yield on 1-year T-bonds one year from now? Be sure to use a geometric average in your calculations. Do not round intermediate calculations. Round your answer to four decimal places. b. If the pure expectations theory is correct, what is the yield on 2-year T-bonds one year from now? Be sure to use a geometric average in your calculations. Do not round intermediate calculations. Round your answer to four decimal places. c. If the pure expectations theory is correct, what is the yield on 1-year T-bonds two years from now? Be sure to use a geometric average in your calculations. Do not round intermediate calculations. Round your answer to four decimal places.
Currently, the term structure is as follows: One-year bonds yield 7%, two-year zero-coupon bonds yield 8%, three-year and longer maturity zero-coupon bonds all yield 9%. You are choosing between one, two, and three-year maturity bonds all paying annual coupons of 8%. You strongly believe that at year-end the yield curve will be flat at 9%. Required: a. Calculate the one year total rate of return for the three bonds. (Do not round intermediate calculations. Round your answers to 2 decimal places.) One year total rate of return One Year b. Which bond you would buy? One-year bond ● Two-year bond Three-year bond Two Years Three Years
Quantitative Problem: Today, interest rates on 1-year T-bonds yield 1.3%, interest rates on 2-year T-bonds yield 2.3%, and interest rates on 3-year T-bonds yield 3.7%. a. If the pure expectations theory is correct, what is the yield on 1-year T-bonds one year from now? Be sure to use a geometric average in your calculations. Do not round intermediate calculations. Round your answer to four decimal places. % 1.3 Show All Feedback b. If the pure expectations theory is correct, what is the yield on 2-year T-bonds one year from now? Be sure to use a geometric average in your calculations. Do not round intermediate calculations. Round your answer to four decimal places. 2.4 % Show All Feedback c. If the pure expectations theory is correct, what is the yield on 1-year T-bonds two years from now? Be sure to use a geometric average in your calculations. Do not round intermediate calculations. Round your answer to four decimal places. 3.8 Show All Feedback
Suppose a 10-year, 10% semiannual coupon bond with a par value of 1,000 is currently selling for 1,135.90, producing a nominal yield to maturity of 8%. However, the bond can be called after 5 years for a price of 1,050. (1) What is the bonds nominal yield to call (YTC)? (2) If you bought this bond, do you think you would be more likely to earn the YTM or the YTC? Why?
Quantitative Problem: Today, interest rates on 1-year T-bonds yield 1.7%, interest rates on 2-year T-bonds yield 2.3%, and interest rates on 3-year T-bonds yield 3.3%. a. If the pure expectations theory is correct, what is the yield ofb 1-year T-bonds one year from now? Be sure to use a geometric average in your calculations. Do not round intermediate calculations. Round your answer to four decimal places. b. If the pure expectations theory is correct, what is the yield on 2-year T-bonds one year from now? Be sure to use a geometric average in your calculations. Do not round intermediate calculations. Round your answer to four decimal places. c. If the pure expectations theory is correct, what is the yield on 1-year T-bonds two years from now? Be sure to use a geometric average in your calculations. Do not round intermediate calculations. Round your answer to four decimal places.
Suppose you are considering two possible investment opportunities: a 12-yearTreasury bond and a 7-year, A-rated corporate bond. The current real risk-free rateis 4%, and inflation is expected to be 2% for the next 2 years, 3% for the following4 years, and 4% thereafter. The maturity risk premium is estimated by this formula:MRP = 0.02(t - 1)%. The liquidity premium (LP) for the corporate bond is estimatedto be 0.3%. You may determine the default risk premium (DRP), given thecompany’s bond rating, from the table below. Remember to subtract the bond’s LPfrom the corporate spread given in the table to arrive at the bond’s DRP. Whatyield would you predict for each of these two investments?RateCorporate Bond Yield
urrently, the term structure is as follows: One-year bonds yield 9.75%, two-year zero - coupon bonds yield 10.75%, three-year nd longer maturity zero - coupon bonds all yield 11.75%. You are choosing between one, two, and three-year maturity bonds I paying annual coupons of 10.75%. You strongly believe that at year - end the yield curve will be flat at 11.75%. equired: Calculate the one year total rate of return for the three bonds. (Do not round intermediate calculations. Round your swers to 2 decimal places.) Answer is complete but not entirely correct. \table[[, One Year, Two Years,Three Years], [he year total rate of return,8.75prop%, 9.75 x %, 10.75×%
Suppose that the prices of zero-coupon bonds with various maturities are given in the following table. The face value of each bond is $1,000. Maturity (Years) 1 2 3 4 5 Price $983.78 865.89 797.92 732.00 660.24 Required: a. Calculate the forward rate of interest for each year. b. How could you construct a 1-year forward loan beginning in year 3? c. How could you construct a 1-year forward loan beginning in year 4?