Question

1. You examine the following yield curve.  Using the Expectations Theory, calculate the estimated yield to maturity of a 2 year bond that begins 2 years from today

   Maturity YTM

1    3.49%

   2      3.64%

   3 3.74%

      4 3.79%

3.94%
		3.87%
		8.04%
		3.99%

2. The nominal APR on your $30,000, auto loan is 4.800%. If you’re making monthly payments, what is the effective annual rate?

4.602%
		5.364%
		4.907%
		7.552%

Answer 1

Part A:

2 Year after 2 year from Today Rate = [ [ (1 + YTM 4 ) ^ 4 / ( 1 + YTM 2 ) ^ 2 ] ^ ( 1 / 2 ) ] - 1
= [ [ ( 1 + 0.0379 ) ^ 4 / ( 1 + 0.0364 ) ^ 2 ] ^ ( 1 / 2 ) ] - 1
= [ [ ( 1.0379 ) ^ 4 / ( 1.0364 ) ^ 2 ] ^ ( 1 / 2 ) ] - 1
= [ [ 1.1604 / 1.0741 ] ^ ( 1 / 2 ) ] - 1
= [ [ 1.0804 ] ^ ( 1 / 2 ) ] - 1
= [ 1.0394 ] - 1
= 0.0394
= I.e 3.94 %
YTM 4 - Spot Rate for 4 Year bond
YTM 2 - Spot Rate for 2 year bond

Option A is correct.

Part B:

Effective Annual Rate = ( 1 + r ) ^ n - 1
r = Int Rate per period
n = No.of periods per anum

Particulars	Amount
Ret period	0.4000%
No. of periods	12.0000

EAR = [ ( 1 + r ) ^ n ] - 1
= [ ( 1 + 0.004 ) ^ 12 ] - 1
= [ ( 1.004 ) ^ 12 ] - 1
= [ 1.0491 ] - 1
= 0.04907
I.e EAR is 4.907 %

OPtion C is correct.