Question

The yields of four zero-coupon bonds of varying maturities are as follows:

Maturity YTM

1 6.1%

2 6.2%

3 6.3%

4 6.4%

If you expect the implied term structure to be the same next year as it is this year, what is the expected return on the 3-year zero coupon bond over the coming year? Please express your answer in percent, rounded to the nearest basis point.

Answer #1

what is the expected return on the 3-year zero coupon bond over the coming year?

(1 + one year interest rate) * (1 + 3 year interest rate one year from now)^3 = (1 + 4 year interest rate)^4

(1 + 0.061) * (1 + 3 year interest rate one year from now)^3 = (1 + 0.064)^4

1.061 * (1 + 3 year interest rate one year from now)^3 = 1.2816

(1 + 3 year interest rate one year from now)^3 = 1.2080

(1 + 3 year interest rate one year from now) = 1.065

**3 year interest rate one year from now =
6.50%**

The yields of four zero-coupon bonds of varying maturities are
as follows:
Maturity
YTM
1
6.1%
2
6.2%
3
6.3%
4
6.4%
If you expect the implied term structure to be the same next
year as it is this year, what is the expected return on the 1-year
zero-coupon bond over the coming year? Please express your answer
in percent, rounded to the nearest basis point.

The yields of four zero-coupon bonds of varying maturities are
as follows:
Maturity
YTM
1
6.1%
2
6.2%
3
6.3%
4
6.4%
If you expect the implied term structure to be the same next
year as it is this year, what is the expected return on the 1-year
zero-coupon bond over the coming year? Please express your answer
in percent, rounded to the nearest basis point.

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
4.3
%
2
5.3
3
6.3
Next year at this time, you expect it to be:
Maturity (Years)
YTM(%)
1
5.3
%
2
6.3
3
7.3
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...

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
4 792.16
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...

You observe the following term structure:
Effective Annual
YTM
1-year
zero-coupon bond
6.1
%
2-year
zero-coupon bond
6.2
3-year
zero-coupon bond
6.3
4-year
zero-coupon bond
6.4
a. If you believe that the term structure next
year will be the same as today’s, calculate the return on (i) the
1-year zero and (ii) the 4-year zero. (Do
not round intermediate calculations. Round your
answers to 1 decimal place.)
One year return on 1-year bond
%
One year return on 4-year bond...

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...

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. (Do not round
intermediate calculations. Round your answers to 2 decimal places .
Omit the "%" sign in your response.
Maturity (Years)
Price of Bond
YTM
Forward Rate
1
$980.90
___%
2
$914.97
___%
____%
3
$843.12
___%
____%
4
$771.76
___%
____%

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 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...

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