The market’s expectation of the yield curve as per the expectations hypothesis from now to 1 year and further calculate the expected values of next year yields on bonds after one year, two years and three years. Introduction: Yield-curve analysis: It is a technique to calculate the difference in interest rate between the note value and the term of to maturity.

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Answer 1

Question

Chapter 15, Problem 9PS

Summary Introduction

To determine: The market’s expectation of the yield curve as per the expectations hypothesis from now to 1 year and further calculate the expected values of next year yields on bonds after one year, two years and three years.

Introduction:

Yield-curve analysis: It is a technique to calculate the difference in interest rate between the note value and the term of to maturity.

Expert Solution & Answer

Answer to Problem 9PS

The forward rate after one year is 7%; after two years it is 7.5% and after three years it is 8.51%.

Explanation of Solution

We have been given the following information:

Bond	Years to Maturity	YTM (%)
A	1	5
B	2	6
C	3	6.5
D	4	7

We have to calculate the expected rate. Expected rate is called as expected hypothesis. The following formula can be used for calculation.

1+Forward rateExpected return=( ( 1+Yield to maturit y Number of years ) Number of years ( 1+Yield to maturit y Number of years−1 ) Number of years−1)

Calculation of expected rate after one year:

Forward rate1year=( ( 1+Yield to maturit y Number of years ) Number of years ( 1+Yield to maturit y Number of years−1 ) Number of years−1 )−1=( ( 1+Yield to maturit y 2 ) 2 ( 1+Yield to maturit y 1 ) 1 )−1=( ( 1+6% ) 2 ( 1+5% ) 1 )−1=( ( 1+0.06 ) 2 ( 1+0.05 ) 1 )−1=( ( 1.06 ) 2 ( 1.05 ) 1 )−1=1.12361.05−1=1.0700−1=0.0700

When converted into percentages, it becomes 7%.

Calculation of expected rate after two years

Forward rate2years=( ( 1+Yield to maturit y Number of years ) Number of years ( 1+Yield to maturit y Number of years−1 ) Number of years−1 )−1=( ( 1+Yield to maturit y 3 ) 3 ( 1+Yield to maturit y 2 ) 2 )−1=( ( 1+6.5% ) 3 ( 1+6 ) 2 )−1=( ( 1+0.065 ) 3 ( 1+0.06 ) 2 )−1=( ( 1.065 ) 3 ( 1.06 ) 2 )−1=1.20791.1236−1=1.0750−1=0.0750

When converted into percentages, it becomes 7.5%.

Calculation of expected rate after 3 years:

The percentages have to be converted into decimals by dividing it by 100.

=( ( 1+0.07 ) 4 ( 1+0.065 ) 3 )−1=( ( 1.07 ) 4 ( 1.065 ) 3 )−1=1.310796011.20794963−1=1.0851−1=0.0851

When converted into percentages, it becomes 8.51%.

Therefore, the forward rate after one year is 7%; after two years it is 7.5% and after three years it is 8.51%.

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Students have asked these similar questions

Consider the following $1,000 par value zero-coupon bonds: Years to Maturity 1 2 3 4 Bond A B C D Required: According to the expectations hypothesis, what is the market's expectation of the yield curve one year from now? Specifically, what are the expected values of next year's yields on bonds with maturities of (a) one year? (b) two years? (c) three years? Note: Do not round intermediate calculations. Round your answers to 2 decimal places. Bond B C D YTM (%) 5.2% 6.2 6.7 7.2 Years to Maturity 1 2 3 YTM (%) % % %

Required: a. Assuming that the expectations hypothesis is valid, compute the expected price of the four-year zero coupon bond shown below at the end of (i) the first year; (ii) the second year; (iii) the third year; (iv) the fourth year. b. What is the rate of return of the bond in years 1, 2, 3, and 4? Conclude that the expected return equals the forward rate for each year. Complete this question by entering your answers in the tabs below. Required A Required B Assuming that the expectations hypothesis is valid, compute the expected price of the four-year zero coupon bond shown below at the end of (i) the first year; (ii) the second year; (iii) the third year; (iv) the fourth year. Note: Do not round intermediate calculations. Round your answers to 2 decimal places. Beginning Price of Bond of Year Expected Price 1 $ 935.90 2 $ 906.47 3 $ 837.12 4 $ 775.39 Required A Required B > B

d Required: a. Assuming that the expectations hypothesis is valid, compute the expected price of the four-year zero coupon bond shown below at the end of (i) the first year; (ii) the second year; (iii) the third year; (iv) the fourth year. b. What is the rate of return of the bond in years 1, 2, 3, and 4? Conclude that the expected return equals the forward rate for each year. Complete this question by entering your answers in the tabs below. Required A Required B Assuming that the expectations hypothesis is valid, compute the expected price of the four-year zero coupon bond shown below at the end of (i) the first year; (ii) the second year; (iii) the third year; (iv) the fourth year. Note: Do not round intermediate calculations. Round your answers to 2 decimal places. Beginning of Year 1 2 3 4 Price of Bond 948.40 921.47 832.62 781.99 $ $ GA $ $ Expected Price $ $ $ 1,150.22 X 1,144.95 X 965.60 x 937.47

Answer 2

Question

Chapter 15, Problem 9PS

Summary Introduction

To determine: The market’s expectation of the yield curve as per the expectations hypothesis from now to 1 year and further calculate the expected values of next year yields on bonds after one year, two years and three years.

Introduction:

Yield-curve analysis: It is a technique to calculate the difference in interest rate between the note value and the term of to maturity.

Expert Solution & Answer

Answer to Problem 9PS

The forward rate after one year is 7%; after two years it is 7.5% and after three years it is 8.51%.

Explanation of Solution

We have been given the following information:

Bond	Years to Maturity	YTM (%)
A	1	5
B	2	6
C	3	6.5
D	4	7

We have to calculate the expected rate. Expected rate is called as expected hypothesis. The following formula can be used for calculation.

1+Forward rateExpected return=( ( 1+Yield to maturit y Number of years ) Number of years ( 1+Yield to maturit y Number of years−1 ) Number of years−1)

Calculation of expected rate after one year:

Forward rate1year=( ( 1+Yield to maturit y Number of years ) Number of years ( 1+Yield to maturit y Number of years−1 ) Number of years−1 )−1=( ( 1+Yield to maturit y 2 ) 2 ( 1+Yield to maturit y 1 ) 1 )−1=( ( 1+6% ) 2 ( 1+5% ) 1 )−1=( ( 1+0.06 ) 2 ( 1+0.05 ) 1 )−1=( ( 1.06 ) 2 ( 1.05 ) 1 )−1=1.12361.05−1=1.0700−1=0.0700

When converted into percentages, it becomes 7%.

Calculation of expected rate after two years

Forward rate2years=( ( 1+Yield to maturit y Number of years ) Number of years ( 1+Yield to maturit y Number of years−1 ) Number of years−1 )−1=( ( 1+Yield to maturit y 3 ) 3 ( 1+Yield to maturit y 2 ) 2 )−1=( ( 1+6.5% ) 3 ( 1+6 ) 2 )−1=( ( 1+0.065 ) 3 ( 1+0.06 ) 2 )−1=( ( 1.065 ) 3 ( 1.06 ) 2 )−1=1.20791.1236−1=1.0750−1=0.0750

When converted into percentages, it becomes 7.5%.

Calculation of expected rate after 3 years:

The percentages have to be converted into decimals by dividing it by 100.

=( ( 1+0.07 ) 4 ( 1+0.065 ) 3 )−1=( ( 1.07 ) 4 ( 1.065 ) 3 )−1=1.310796011.20794963−1=1.0851−1=0.0851

When converted into percentages, it becomes 8.51%.

Therefore, the forward rate after one year is 7%; after two years it is 7.5% and after three years it is 8.51%.

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Answer 3

Question

Chapter 15, Problem 9PS

Summary Introduction

To determine: The market’s expectation of the yield curve as per the expectations hypothesis from now to 1 year and further calculate the expected values of next year yields on bonds after one year, two years and three years.

Introduction:

Yield-curve analysis: It is a technique to calculate the difference in interest rate between the note value and the term of to maturity.

Expert Solution & Answer

Answer to Problem 9PS

The forward rate after one year is 7%; after two years it is 7.5% and after three years it is 8.51%.

Explanation of Solution

We have been given the following information:

Bond	Years to Maturity	YTM (%)
A	1	5
B	2	6
C	3	6.5
D	4	7

We have to calculate the expected rate. Expected rate is called as expected hypothesis. The following formula can be used for calculation.

1+Forward rateExpected return=( ( 1+Yield to maturit y Number of years ) Number of years ( 1+Yield to maturit y Number of years−1 ) Number of years−1)

Calculation of expected rate after one year:

Forward rate1year=( ( 1+Yield to maturit y Number of years ) Number of years ( 1+Yield to maturit y Number of years−1 ) Number of years−1 )−1=( ( 1+Yield to maturit y 2 ) 2 ( 1+Yield to maturit y 1 ) 1 )−1=( ( 1+6% ) 2 ( 1+5% ) 1 )−1=( ( 1+0.06 ) 2 ( 1+0.05 ) 1 )−1=( ( 1.06 ) 2 ( 1.05 ) 1 )−1=1.12361.05−1=1.0700−1=0.0700

When converted into percentages, it becomes 7%.

Calculation of expected rate after two years

Forward rate2years=( ( 1+Yield to maturit y Number of years ) Number of years ( 1+Yield to maturit y Number of years−1 ) Number of years−1 )−1=( ( 1+Yield to maturit y 3 ) 3 ( 1+Yield to maturit y 2 ) 2 )−1=( ( 1+6.5% ) 3 ( 1+6 ) 2 )−1=( ( 1+0.065 ) 3 ( 1+0.06 ) 2 )−1=( ( 1.065 ) 3 ( 1.06 ) 2 )−1=1.20791.1236−1=1.0750−1=0.0750

When converted into percentages, it becomes 7.5%.

Calculation of expected rate after 3 years:

The percentages have to be converted into decimals by dividing it by 100.

=( ( 1+0.07 ) 4 ( 1+0.065 ) 3 )−1=( ( 1.07 ) 4 ( 1.065 ) 3 )−1=1.310796011.20794963−1=1.0851−1=0.0851

When converted into percentages, it becomes 8.51%.

Therefore, the forward rate after one year is 7%; after two years it is 7.5% and after three years it is 8.51%.

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Answer 4

Question

Chapter 15, Problem 9PS

Summary Introduction

To determine: The market’s expectation of the yield curve as per the expectations hypothesis from now to 1 year and further calculate the expected values of next year yields on bonds after one year, two years and three years.

Introduction:

Yield-curve analysis: It is a technique to calculate the difference in interest rate between the note value and the term of to maturity.

Expert Solution & Answer

Answer to Problem 9PS

The forward rate after one year is 7%; after two years it is 7.5% and after three years it is 8.51%.

Explanation of Solution

We have been given the following information:

Bond	Years to Maturity	YTM (%)
A	1	5
B	2	6
C	3	6.5
D	4	7

We have to calculate the expected rate. Expected rate is called as expected hypothesis. The following formula can be used for calculation.

1+Forward rateExpected return=( ( 1+Yield to maturit y Number of years ) Number of years ( 1+Yield to maturit y Number of years−1 ) Number of years−1)

Calculation of expected rate after one year:

Forward rate1year=( ( 1+Yield to maturit y Number of years ) Number of years ( 1+Yield to maturit y Number of years−1 ) Number of years−1 )−1=( ( 1+Yield to maturit y 2 ) 2 ( 1+Yield to maturit y 1 ) 1 )−1=( ( 1+6% ) 2 ( 1+5% ) 1 )−1=( ( 1+0.06 ) 2 ( 1+0.05 ) 1 )−1=( ( 1.06 ) 2 ( 1.05 ) 1 )−1=1.12361.05−1=1.0700−1=0.0700

When converted into percentages, it becomes 7%.

Calculation of expected rate after two years

Forward rate2years=( ( 1+Yield to maturit y Number of years ) Number of years ( 1+Yield to maturit y Number of years−1 ) Number of years−1 )−1=( ( 1+Yield to maturit y 3 ) 3 ( 1+Yield to maturit y 2 ) 2 )−1=( ( 1+6.5% ) 3 ( 1+6 ) 2 )−1=( ( 1+0.065 ) 3 ( 1+0.06 ) 2 )−1=( ( 1.065 ) 3 ( 1.06 ) 2 )−1=1.20791.1236−1=1.0750−1=0.0750

When converted into percentages, it becomes 7.5%.

Calculation of expected rate after 3 years:

The percentages have to be converted into decimals by dividing it by 100.

=( ( 1+0.07 ) 4 ( 1+0.065 ) 3 )−1=( ( 1.07 ) 4 ( 1.065 ) 3 )−1=1.310796011.20794963−1=1.0851−1=0.0851

When converted into percentages, it becomes 8.51%.

Therefore, the forward rate after one year is 7%; after two years it is 7.5% and after three years it is 8.51%.

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Answer 5

Chapter 15, Problem 9PS

Summary Introduction

To determine: The market’s expectation of the yield curve as per the expectations hypothesis from now to 1 year and further calculate the expected values of next year yields on bonds after one year, two years and three years.

Introduction:

Yield-curve analysis: It is a technique to calculate the difference in interest rate between the note value and the term of to maturity.

Expert Solution & Answer

Answer to Problem 9PS

The forward rate after one year is 7%; after two years it is 7.5% and after three years it is 8.51%.

Explanation of Solution

We have been given the following information:

Bond	Years to Maturity	YTM (%)
A	1	5
B	2	6
C	3	6.5
D	4	7

We have to calculate the expected rate. Expected rate is called as expected hypothesis. The following formula can be used for calculation.

1+Forward rateExpected return=( ( 1+Yield to maturit y Number of years ) Number of years ( 1+Yield to maturit y Number of years−1 ) Number of years−1)

Calculation of expected rate after one year:

Forward rate1year=( ( 1+Yield to maturit y Number of years ) Number of years ( 1+Yield to maturit y Number of years−1 ) Number of years−1 )−1=( ( 1+Yield to maturit y 2 ) 2 ( 1+Yield to maturit y 1 ) 1 )−1=( ( 1+6% ) 2 ( 1+5% ) 1 )−1=( ( 1+0.06 ) 2 ( 1+0.05 ) 1 )−1=( ( 1.06 ) 2 ( 1.05 ) 1 )−1=1.12361.05−1=1.0700−1=0.0700

When converted into percentages, it becomes 7%.

Calculation of expected rate after two years

Forward rate2years=( ( 1+Yield to maturit y Number of years ) Number of years ( 1+Yield to maturit y Number of years−1 ) Number of years−1 )−1=( ( 1+Yield to maturit y 3 ) 3 ( 1+Yield to maturit y 2 ) 2 )−1=( ( 1+6.5% ) 3 ( 1+6 ) 2 )−1=( ( 1+0.065 ) 3 ( 1+0.06 ) 2 )−1=( ( 1.065 ) 3 ( 1.06 ) 2 )−1=1.20791.1236−1=1.0750−1=0.0750

When converted into percentages, it becomes 7.5%.

Calculation of expected rate after 3 years:

The percentages have to be converted into decimals by dividing it by 100.

=( ( 1+0.07 ) 4 ( 1+0.065 ) 3 )−1=( ( 1.07 ) 4 ( 1.065 ) 3 )−1=1.310796011.20794963−1=1.0851−1=0.0851

When converted into percentages, it becomes 8.51%.

Therefore, the forward rate after one year is 7%; after two years it is 7.5% and after three years it is 8.51%.

Answer 6

Chapter 15, Problem 9PS

Summary Introduction

To determine: The market’s expectation of the yield curve as per the expectations hypothesis from now to 1 year and further calculate the expected values of next year yields on bonds after one year, two years and three years.

Introduction:

Yield-curve analysis: It is a technique to calculate the difference in interest rate between the note value and the term of to maturity.

Expert Solution & Answer

Answer to Problem 9PS

The forward rate after one year is 7%; after two years it is 7.5% and after three years it is 8.51%.

Explanation of Solution

We have been given the following information:

Bond	Years to Maturity	YTM (%)
A	1	5
B	2	6
C	3	6.5
D	4	7

We have to calculate the expected rate. Expected rate is called as expected hypothesis. The following formula can be used for calculation.

1+Forward rateExpected return=( ( 1+Yield to maturit y Number of years ) Number of years ( 1+Yield to maturit y Number of years−1 ) Number of years−1)

Calculation of expected rate after one year:

Forward rate1year=( ( 1+Yield to maturit y Number of years ) Number of years ( 1+Yield to maturit y Number of years−1 ) Number of years−1 )−1=( ( 1+Yield to maturit y 2 ) 2 ( 1+Yield to maturit y 1 ) 1 )−1=( ( 1+6% ) 2 ( 1+5% ) 1 )−1=( ( 1+0.06 ) 2 ( 1+0.05 ) 1 )−1=( ( 1.06 ) 2 ( 1.05 ) 1 )−1=1.12361.05−1=1.0700−1=0.0700

When converted into percentages, it becomes 7%.

Calculation of expected rate after two years

Forward rate2years=( ( 1+Yield to maturit y Number of years ) Number of years ( 1+Yield to maturit y Number of years−1 ) Number of years−1 )−1=( ( 1+Yield to maturit y 3 ) 3 ( 1+Yield to maturit y 2 ) 2 )−1=( ( 1+6.5% ) 3 ( 1+6 ) 2 )−1=( ( 1+0.065 ) 3 ( 1+0.06 ) 2 )−1=( ( 1.065 ) 3 ( 1.06 ) 2 )−1=1.20791.1236−1=1.0750−1=0.0750

When converted into percentages, it becomes 7.5%.

Calculation of expected rate after 3 years:

The percentages have to be converted into decimals by dividing it by 100.

=( ( 1+0.07 ) 4 ( 1+0.065 ) 3 )−1=( ( 1.07 ) 4 ( 1.065 ) 3 )−1=1.310796011.20794963−1=1.0851−1=0.0851

When converted into percentages, it becomes 8.51%.

Therefore, the forward rate after one year is 7%; after two years it is 7.5% and after three years it is 8.51%.

Answer 7

Chapter 15, Problem 9PS

Summary Introduction

To determine: The market’s expectation of the yield curve as per the expectations hypothesis from now to 1 year and further calculate the expected values of next year yields on bonds after one year, two years and three years.

Introduction:

Yield-curve analysis: It is a technique to calculate the difference in interest rate between the note value and the term of to maturity.

Answer 8

Expert Solution & Answer

Answer to Problem 9PS

The forward rate after one year is 7%; after two years it is 7.5% and after three years it is 8.51%.

Answer 9

Expert Solution & Answer

Answer 10

Expert Solution & Answer

Answer 11

Explanation of Solution

We have been given the following information:

Bond	Years to Maturity	YTM (%)
A	1	5
B	2	6
C	3	6.5
D	4	7

We have to calculate the expected rate. Expected rate is called as expected hypothesis. The following formula can be used for calculation.

1+Forward rateExpected return=( ( 1+Yield to maturit y Number of years ) Number of years ( 1+Yield to maturit y Number of years−1 ) Number of years−1)

Calculation of expected rate after one year:

Forward rate1year=( ( 1+Yield to maturit y Number of years ) Number of years ( 1+Yield to maturit y Number of years−1 ) Number of years−1 )−1=( ( 1+Yield to maturit y 2 ) 2 ( 1+Yield to maturit y 1 ) 1 )−1=( ( 1+6% ) 2 ( 1+5% ) 1 )−1=( ( 1+0.06 ) 2 ( 1+0.05 ) 1 )−1=( ( 1.06 ) 2 ( 1.05 ) 1 )−1=1.12361.05−1=1.0700−1=0.0700

When converted into percentages, it becomes 7%.

Calculation of expected rate after two years

Forward rate2years=( ( 1+Yield to maturit y Number of years ) Number of years ( 1+Yield to maturit y Number of years−1 ) Number of years−1 )−1=( ( 1+Yield to maturit y 3 ) 3 ( 1+Yield to maturit y 2 ) 2 )−1=( ( 1+6.5% ) 3 ( 1+6 ) 2 )−1=( ( 1+0.065 ) 3 ( 1+0.06 ) 2 )−1=( ( 1.065 ) 3 ( 1.06 ) 2 )−1=1.20791.1236−1=1.0750−1=0.0750