Question

Consider the following $1,000 par value zero-coupon
bonds:

Bond | Years to Maturity | YTM(%) | |

A | 1 | 6.5 | % |

B | 2 | 7.5 | |

C | 3 | 8.0 | |

D | 4 | 8.5 | |

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?
**(Do not round intermediate calculations. Round your answers
to 2 decimal places.)**

Answer #1

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Consider the following $1,000 par value zero-coupon bonds:
Bond
Years to Maturity
YTM(%)
A
1
6.0
%
B
2
7.0
C
3
7.5
D
4
8.0
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?
Bond
YTM
YTM (%)
B
1
C
2
D
3

The yield to maturity (YTM) on 1-year zero-coupon bonds is 7%
and the YTM on 2-year zeros is 8%. The yield to maturity on
2-year-maturity coupon bonds with coupon rates of 11% (paid
annually) is 7.5%.
a. What arbitrage opportunity is available for
an investment banking firm?
The arbitrage strategy is to buy zeros with face values of
$ and $ , and respective maturities of one
year and two years.
b. What is the profit on the activity?
(Do not round...

The yield to maturity (YTM) on 1-year zero-coupon bonds is 7%
and the YTM on 2-year zeros is 8%. The yield to maturity on
2-year-maturity coupon bonds with coupon rates of 11% (paid
annually) is 7.5%.
a. What arbitrage opportunity is available for
an investment banking firm?
The arbitrage strategy is to buy zeros with face values of
$ and $ , and respective maturities of one
year and two years.
b. What is the profit on the activity?
(Do not round...

The maturities and yields of three zero-coupon bonds are as
follows:
Maturity
YTM
1
4%
2
5%
3
6%
Next year, you expect the yields on zero-coupon bonds to be as
follows:
Maturity
YTM
1
5%
2
6%
3
7%
What is the market's expectation of the rate of
return on a 3-year zero-coupon bond over the coming year, assuming
the expectations hypothesis holds? Please express your answer in
percent rounded to the nearest basis point.

The term structure for zero-coupon bonds is currently:
Maturity (Years)
YTM(%)
1
5.0
%
2
6.0
3
7.0
Next year at this time, you expect it to be:
Maturity (Years)
YTM(%)
1
6.0
%
2
7.0
3
8.0
a. What do you expect the rate of return
to be over the coming year on a 3-year zero-coupon bond?
(Round your answer to 1 decimal place.)
b-1. Under the expectations theory, what yields to
maturity does the market expect to observe...

Below are yields of risk-free zero-coupon $1,000-par-value bonds
of various maturities.
Maturity (years)
1
2
3
4
5
YTM
3.25%
3.50%
3.9%
4.25%
Fill in the blank if market price of the five-year zero-coupon
bond is 809.79.
Construct yield curve using values from the table.
Suppose you would like to finance a project with equity. The
project is expected to deliver cash flows during the next 3 years.
Which of the risk-free rates from the table above you would use...

The yield to maturity (YTM) on 1-year zero-coupon bonds is 5%
and the YTM on 2-year zeros is 6%. The yield to maturity on
2-year-maturity coupon bonds with coupon rates of 12% (paid
annually) is 5.8%.
a. What arbitrage opportunity is available for
an investment banking firm?
The arbitrage strategy is to buy zeros with face values of $____
and $____ , and respective maturities of one year and two
years.
b. What is the profit on the activity?
(Do...

57. Consider the following $1,000 par value zero-coupon
bonds:
Bond YTM . TYM
A . 1 . 6.00%
B . 2 . 7.00%
C . 3 . 8.32%
D . 4 . 8.49%
E . 5 . 10.70%
The expected one-year interest rate three years from now should be
__________.
a. 7.00%
b. 8.00%
C. 9.00%
d. 10.00%

Your company currently has $1,000 par, 6.5% coupon bonds with
10 years to maturity and a price of $1,070. If you want to issue
new 10-year coupon bonds at par, what coupon rate do you need to
set? Assume that for both bonds, the next coupon payment is due in
exactly six months. You need to set a coupon rate of ____%. (Round
to two decimal places.)

3. The yield to maturity on 1-year zero-coupon bonds is
currently 7%; the YTM on 2-year zeros is 8%. The Treasury plans to
issue a 2-year maturity coupon bond, paying coupons once
per year
with a coupon rate of 9%. The face value of the bond is
$100.
c. If the expectations theory of the yield curve is
correct, what is the market expectation of the price for which the
bond will sell next year?
d. Recalculate your answer to...

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