EBK INVESTMENTS
11th Edition
ISBN: 9781259357480
Author: Bodie
Publisher: MCGRAW HILL BOOK COMPANY
expand_more
expand_more
format_list_bulleted
Question
Chapter 5, Problem 8PS
Summary Introduction
Introduction: The holding period return is the total return earned by holding a certain asset or portfolio of assets over its whole holding period; it is generally expressed in percentage of the initial value.
To prepare: The probability distribution of one year holding period return and price.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Derive the probability distribution of the 1-year HPR on a 30-year U.S. Treasury bond with a 3.0% coupon if it is currently selling at
par and the probability distribution of its yield to maturity a year from now is as shown in the table below. (Assume the entire 3.0%
coupon is paid at the end of the year rather than every 6 months. Assume a par value of $100.)
Note: Leave no cells blank - be certain to enter "0" wherever required. Negative values should be indicated by a minus sign.
Do not round intermediate calculations. Round your answers to 2 decimal places.
Economy
Boom
Normal Growth
Recession
Probability
0.35
0.40
0.25
YTM
12.0 %
10.0 %
9.0 %
Price
Capital Gain
$
Coupon
Interest
3.00
3.00
3.00
HPR
%
%
%
Derive the probability distribution of the 1-year HPR on a 30-year U.S. Treasury bond with a coupon of 4.0% if it is currently selling at par and the probability distribution of its yield to maturity a year from now is as shown in the table below. (Assume the entire 4.0% coupon is paid at the end of the year rather than every 6 months. Assume a par value of $100.) (Leave no cells blank - be certain to enter "0" wherever required. Negative values should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 2 decimal places.)
Economy
Probability
YTM
price
capital gain
coupon interest
HPR
boom
0.25
10%
normal growth
0.50
9%
recession
0.25
8%
Derive the probability distribution of the 1-year HPR on a 30-year U.S. Treasury bond with an
8% coupon if it is currently selling at par and the probability distribution of its yield to maturity
a year from now is as follows:
State of the Economy
Boom
Normal growth
Recession
Probability
0.20
0.50
0.30
YTM
11.0%
8.0
7.0
For simplicity, assume the entire 8% coupon is paid at the end of the year rather than every
6 months.
Knowledge Booster
Similar questions
- Consider a 4-years bond with a 8% annual coupon rate and semi-annual payments. Let us suppose that the zero coupon curve rate today with annual compounding is given by the one in Table 1.(a) Calculate the discount factors for all the previous maturities and then the bond price.(b) Calculate the equivalent continuous compounding rates. What do you expect as result for the bond price with these rates? Should it be lower, higher or equal to the one in part (a)? Why? The equivalent continuous compounding rates should be lower than the annual rates. Why?arrow_forwardSuppose that you buy a TIPS (inflation-indexed) bond with a 1-year maturity and a coupon of 2% paid annually. Assume you buy the bond at its face value of $1,000, and the inflation rate is 10%. a. What will be your cash flow at the end of the year? (Do not round intermediate calculations. Round your answer to 2 decimal places.) b. What will be your real return? c. What will be your nominal return? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)arrow_forwardSuppose the real risk-free rate of interest is r*=4%�*=4% and it is expected to remain constant over time. Inflation is expected to be 1.60% per year for the next two years and 3.90% per year for the next three years. The maturity risk premium is 0.1×(t−1)%0.1×�−1%, where t� is number of years to maturity, a liquidity premium is 0.45%, and the default risk premium for a corporate bond is 1.40%. The average inflation during the first 4 years is2.37% . What is the yield on a 4-year Treasury bond? 4.30% 8.90% 6.75% 7.05% What is the yield on a 4-year BBB-rated bond? 8.90% 7.50% 7.05% 8.45% If the yield on a 5–year Treasury bond is 7.38% and the yield on a 6–year Treasury bond is 7.83%, the expected inflation in 6 years is . (Hint: Do not round intermediate calculations.)arrow_forward
- Suppose that you buy a two-year 8% bond at its face value. a. What will be your total nominal return over the two years if inflation is 3% in the first year and 5% in the second? b. What will be your total real return?arrow_forwardThe real risk-free rate is 2.25%. Inflation is expected to be 2.5%this year and 4.25% during the next 2 years. Assume that the maturity risk premium iszero. What is the yield on 2-year Treasury securities? What is the yield on 3-year Treasurysecurities?arrow_forwardConsider a long forward contract to purchase a coupon-bearing bond whose current price is $910. We will suppose that the forward contract matures in 9 months. We will also suppose that a coupon payment of $45 is expected after 4 months. We assume that the 4-month and 9-month risk-free interest rates (continuously compounded) are, respectively, 3% and 4% per annum. Explain how an arbitrageur can make profits from this scenario.arrow_forward
- Consider a bond with a 10% coupon and yield to maturity = 8%. If the bond’s yield to maturity remains constant, then in one year, will the bond price be higher, lower, or unchanged? Why?arrow_forwardSuppose the real risk-free rate of interest is r=4% and it is expected to remain constant over time. Inflation is expected to be 1.60% per year for the next two years and 3.90% per year for the next three years. The maturity risk premium is 0.1 x (t-1) %, where t is number of years to maturity, a liquidity premium is 0.45%, and the default risk premium for a corporate bond is 1.40%, The average inflation during the first 4 years is What is the yield on a 4-year Treasury bond? O 6.75% O 8.90% O 4.30% O 7.05% What is the yield on a 4-year BBB-rated bond? O 7.50% O 7.05 % O 8.45% 8.90% If the yield on a 5-year Treasury bond is 7.38% and the yield on a 6-year Treasury bond is 7.83%, the expected inflation in 6 years is (Hint: Do not round intermediate calculations.)arrow_forwardSuppose you purchase a ten-year bond with 12% annual coupons. You hold the bond for four years and sell it immediately after receiving the fourth coupon. If the bond's yield to maturity was 10.64% when you purchased and sold the bond, a. What cash flows will you pay and receive from your investment in the bond per $100 face value? b. What is the internal rate of return of your investment? Note: Assume annual compounding. a. What cash flows will you pay and receive from your investment in the bond per $100 face value? The cash flow at time 1-3 is $ (Round to the nearest cent. Enter a cash outflow as a negative number.) The cash outflow at time 0 is $ number.) (Round to the nearest cent. Enter a cash outflow as a negative The total cash flow at time 4 (after the fourth coupon) is $. (Round to the nearest cent. Enter a cash outflow as a negative number.) b. What is the internal rate of return of your investment? The internal rate of return of your investment is %. (Round to two decimal…arrow_forward
- ces Derive the probability distribution of the 1-year HPR on a 30-year U.S. Treasury bond with a coupon of 4.0% if it is par and the probability distribution of its yield to maturity a year from now is as shown in the table below. (Assume coupon is paid at the end of the year rather than every 6 months. Assume a par value of $100.) (Leave no cells bl enter "0" wherever required. Negative values should be indicated by a minus sign. Do not round intermediate your answers to 2 decimal places.) Economy Boom Normal Growth Recession Probability 0.20 0.60 0.20 YTM 11.0 % 9.0 % 7.0% Price Capital Gain Coupon Interest HPR % % %arrow_forwardThe real risk-free rate is 2.25%. Inflation is expected to be 1.75% this year and 3.50% during the next 2 years. Assume that the maturity risk premium is zero. What is the yield on 2-year Treasury securities? What is the yield of 3-year Treasury securities?arrow_forwardSuppose that the yield curve shows that the one-year bond yield is 8 percent, the two-year yield is 7 percent, and the three-year yield is 7 percent. Assume that the risk premium on the one-year bond is zero, the risk premium on the two-year bond is 1 percent, and the risk premium on the three-year bond is 2 percent. a. What are the expected one-year interest rates next year and the following year? The expected one-year interest rate next year = The expected one-year interest rate the following year b. If the risk premiums were all zero, as in the expectations hypothesis, what would the slope of the yield curve be? The slope of the yield curve would be (Click to select) % %arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning
Intermediate Financial Management (MindTap Course...
Finance
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Cengage Learning