Question

Prices of zero-coupon bonds reveal the following pattern of
forward rates:

Year | Forward Rate | |

1 | 8 | % |

2 | 11 | |

3 | 13 | |

In addition to the zero-coupon bond, investors also may purchase a
3-year bond making annual payments of $55 with par value
$1,000.

**a.** What is the price of the coupon bond?
**(Do not round intermediate calculations. Round your answer
to 2 decimal places.)**

**b.** What is the yield to maturity of the coupon
bond? **(Do not round intermediate calculations. Round your
answer to 2 decimal places.)**

**c.** Under the expectations hypothesis, what is the
expected realized compound yield of the coupon bond? **(Do
not round intermediate calculations. Round your answer to 2 decimal
places.)**

**d.** If you forecast that the yield curve in 1 year
will be flat at 8.0%, what is your forecast for the expected rate
of return on the coupon bond for the 1-year holding period?
**(Do not round intermediate calculations. Round your answer
to 2 decimal places.)**

Answer #1

```
a)
Price of coupon bond = ($55 / 1.08) + ($55 / (1.08 * 1.11)) + (($1000 + $55) / (1.08 * 1.11 * 1.13))
= $875.61
Price of coupon bond = $875.61
b)
FV = 1000
Nper = 3
PMT = 55
PV = 875.61
Yield to maturity can be calculated by using the following excel formula:
=RATE(nper,pmt,pv,fv)
=RATE(3,55,-875.61,1000)
= 10.55%
Yield to maturity = 10.55%
c)
Realized compound yield = ((($55 * 1.11 * 1.13) + ($55 * 1.13) + $1055) / $875.61)^(1/3) - 1
= 1.1065 - 1
= 10.65%
Realized compound yield = 10.65%
d)
Expected rate of return = (($55 / 1.08) + ($1055 / 1.08^2) + $55) / $875.61 - 1
= 1.1540 - 1
= 15.40%
Expected rate of return = 15.40%
```

Prices of zero-coupon bonds
reveal the following pattern of forward rates:
Year
Forward
Rate
1
6%
2
7
3
8
In addition to the zero-coupon bond, investors also may purchase
a 3-year bond making annual payments of $60 with par value
$1,000.
a.
What is the price of the coupon bond?(Do not round
intermediate calculations. Round your answer to 2 decimal places.
Omit the "$" sign in your response.)
Price
$
b.
What is...

Prices of zero-coupon bonds reveal the following pattern of
forward rates:
Year
Forward Rate
1
6
%
2
7
3
9
In addition to the zero-coupon bond, investors also may purchase
a 3-year bond making annual payments of $60 with par value
$1,000.
a. What is the price of the coupon bond?
(Do not round intermediate calculations. Round your answer
to 2 decimal places.)
b. What is the yield to maturity of the coupon
bond? (Do not round intermediate calculations....

The yield to maturity on one-year zero-coupon bonds is 7.4%. The
yield to maturity on two-year zero-coupon bonds is 8.4%.
a. What is the forward rate of interest for the
second year? (Do not round intermediate
calculations. Round your answer to 2 decimal
places.)
Forward rate of interest
%
b. If you believe in the expectations
hypothesis, what is your best guess as to the expected value of the
short-term interest rate next year? (Do not round
intermediate calculations. Round...

The following is a list of prices for zero-coupon bonds of
various maturities.
a. Calculate the yield to maturity for a bond
with a maturity of (i) one year; (ii) two years; (iii) three years;
(iv) four years. (Do not round intermediate
calculations. Round your answers to two decimal
places.)
b. Calculate the forward rate for (i) the
second year; (ii) the third year; (iii) the fourth year.
(Do not round intermediate calculations.
Round your answers to two decimal places.)...

The yield to maturity on one-year zero coupon bonds is 4.98%.
The yield to maturity on two-year zero coupon bonds is 6.94%.
a. What is the forward rate of interest for the
second year? (Round your answer to 2 decimal
places.)
Forward rate
%
b. According to the expectations hypothesis,
what is the expected value of the one-year interest rate for next
year? (Round your answer to 2 decimal places.)
Expected value

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.)

The following is a list of prices for zero-coupon bonds of
various maturities.
a. Calculate the yield to maturity for a bond
with a maturity of (i) one year; (ii) two years; (iii) three years;
(iv) four years. (Do not round intermediate
calculations. Round your answers to two decimal
places.)
Maturity (years)
Price of Bond
1
$
955.90
2
916.47
3
834.12
4
766.39
b. Calculate the forward rate for (i) the
second year; (ii) the third year; (iii) the...

A 25-year, $1,000 par value zero-coupon rate bond is to be
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a. What should be the initial price of the bond? (Assume annual
compounding. Do not round intermediate calculations and round your
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b. If immediately upon issue, interest rates dropped to 7
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Suppose 2-year
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a. Using the expectations
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Calculate the yield using a geometric average. Do not round
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________ %
b. What is the expected
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1. The following is a list of
prices for zero-coupon bonds of various maturities. Calculate the
yields to maturity of each bond and the implied sequence of forward
rates.
maturity years: Price of bond
1 943.40
2 898.47
3 847.62
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2. [Chapter 15] The current yield curve
for default-free zero-coupon bonds is as follows:
Maturity (Years): YTM%
1 10%
2 11%
3 12%
a. What are the implied
1-year forward rates?
b. Assume that the pure
expectations hypothesis of the term structure...

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