Question

7. Suppose that you buy a 5-year zero-coupon bond today with a face value of $100 and that the yield curve is currently flat at 5% pa nominal. Suppose that immediately after purchasing the bonds, the yield curve becomes flat at 6% pa nominal. Assuming semi-annual compounding and that the bond is sold after 3 years, what is the annualized holding period yield on this bond?

A. 6%

B. 7.13%

C. 8.997%

D. 9.433%

E. 4.34%

8. Suppose that you buy a 5-year bond today with 8% p.a. coupons and that the yield curve is currently flat at 5% pa nominal. Suppose that immediately after purchasing the bonds, the yield curve becomes flat at 6% pa nominal. Assuming a face value of $100 and semi-annual compounding and that the bond is sold after 3 years, what is the annualized holding period yield on this bond?

A.6%

B. 8.422%

C. 10.66%

D. 4.58%

E. 7.29%

9. Homer Simpson is considering two investment options. Option 1 involves investing in a zero coupon bond for two years. Option 2 involves investing in a zero coupon bond for five years and then selling that bond in two-year’s time. Assume for this question that three and five year bonds are illiquid at all times. Which of the following are correct?

i. According to the market segmentation hypothesis, Option 2 would be preferred to Option 1.

ii.
According to the liquidity premium hypothesis, Option 2 is riskier
than Option 1 because the selling price at *t*=2 could be
very high because three year bonds are illiquid.

iii. According to the pure expectations hypothesis, the expected return from the two strategies, based on information today, is identical.

iv. According
to the preferred habitat theory, Option 1 is preferred to Option 2
but Option 2 may be preferred if Homer Simpson believes that the
three-year spot rate in two-year’s time is more than
*f*_{2,5} .

v.
According to the preferred habitat theory, Option 2 is preferred to
Option 1 if Homer Simpson believes that the three-year spot rate is
equal to *f*_{2,5} .

A. (iii) only

B. (iv) only

C. (ii) & (iii)

D. (i) & (iii) & (iv)

E. (iii) & (iv) & (v)

11. Suppose the yield curve is as shown below. Assuming
semi-annual compounding, what is *f*_{1,4} ?

1 year spot rate: 3%

2 year spot rate: 5%

3 year spot rate: 7%

4 year spot rate: 9%

A. 10.03%

B. 11.04%

C. 12.06%

D. 13.08%

E. 14.08%

Answer #1

Since, multiple questions have been posted, I have answered the first one (Question 7).

_____

**Question
7**

To calculate the annualized holding period yield, we need to determine the price today and price after 3 years with the use of following formula for zero-coupon bonds:

Bond Price = Face Value/(1+Yield/Compounding Frequency)^(Period*Compounding Frequency)

____

Using the information provided in the question in the above formula, we get,

Bond Price (Today) = 100/(1+5%/2)^(5*2) = $78.12

Bond Price (At Year 3) = 100/(1+6%/2)^(2*2) = $88.85

Now, we can calculate the annualized holding period yield with the use of following formula:

**Annualized Holding Period Yield** = (Bond Price
at Year 3/Bond Price (Today))^(1/Period) - 1 = (88.85/78.12)^(1/3)
- 1 = **4.38%** **which is closest to
4.34%**.

Answer is **4.34%** (which is **Option
E**)

Homer Simpson is considering three investment options. Option 1
involves investing in a zero coupon bond for two years. Option 2
involves investing in a five-year zero coupon bond and then selling
that bond in two-year’s time. Option 3 involves investing in a one
year zero coupon bond and then investing in another one year zero
coupon bond when the first zero coupon bond matures. Assume for
this question that three and five year bonds are illiquid at all
times....

Homer Simpson is considering three investment options. Option 1
involves investing in a zero coupon bond for two years. Option 2
involves investing in a five-year zero coupon bond and then selling
that bond in two-year’s time. Option 3 involves investing in a one
year zero coupon bond and then investing in another one year zero
coupon bond when the first zero coupon bond matures. Assume for
this question that three and five year bonds are illiquid at all
times....

1. The price of a 20-year coupon bond, coupon rate 7% p.a.,
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A one- year bond with a 5% annual coupon rate has a current
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10.
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Group of answer choices
None of the answers provided are correct
7.752
13.711
10.732
7.609

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1
2
3
4
5
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$92.52
$88.00
$83.13
$78.10
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