Question

Consider two $1000 par treasury bonds that are zero-coupon: (i) a 1-year bond with a yield to maturity of 2%; (ii) a 2-year bond with a yield to maturity of 4%.

The yield curve is??:

A) Upward sloping

B) Downward sloping

C) Flat

What is the 1-year forward rate (f1,2) based on the expectations model? In other words, what is the expected 1-year rate starting in one year from now and going one year? (to the nearest whole percent)

A) 2%

B) 3%

C) 4%

D) 6%

Answer #1

1)

**Correct answer: A) Upward sloping**

Yield curve shows the relationship between yield rate (market interest rate) and years until maturity. A yield curve is upward sloping when interest rate increases as matuturity of bond increases.

2)

**Correct answer: D) 6%**

Yield rate Year-1 = 2%

Yield rate Year-2 = 4%

Thus,

Yield Curve
A Zero-coupon bond due in one year is selling at 98.5% of par. A
Zero-coupon bond due in two years is selling at 96%of par. Another
Zero-coupon bond due in three years is selling at 93% of par.
What are the yields of the three bonds?
What are the forward rates for year 2 and for year 3?
Is the yield curve upward sloping, downward sloping, or
flat?

The following table summarizes prices of various default-free
zero-coupon bonds (expressed as a percentage of the face
value):
Maturity (years)
1
2
3
4
5
Price (per $100 face value)
$96.09
$91.72
$87.08
$82.23
$77.19
a. Compute the yield to maturity for each bond.
b. Plot the zero-coupon yield curve (for the first five
years).
c. Is the yield curve upward sloping, downward sloping, or
flat?
a. Compute the yield to maturity for each bond.
The yield on the 1-year...

The following table summarizes prices of various default-free
zero-coupon bonds (expressed as a percentage of the face
value):
Maturity (years)
1
2
3
4
5
Price (per $100 face value)
$95.26
$90.77
$86.18
$81.34
$76.09
a. Compute the yield to maturity for each bond.
b. Plot the zero-coupon yield curve (for the first five
years).
c. Is the yield curve upward sloping, downward sloping, or
flat?
a. Compute the yield to maturity for each bond.
The yield on the 1-year...

The following table summarizes the prices the default-free zero
coupon bonds (expressed as a percentage of the face value)
Maturity (years) 1 2 3 4 5
Price (Per face value) $ 96.47 $ 92.08 $ 87..41 $ 82.55 $
77.48
a. compute the yield to maturity of each bond
b.Plot the zero-coupon yield curve (for the first five
years)
c. Is the yield curve upward sloping or downward sloping or
flat?
a. Compute the yield to maturity of each bond

The following table summarizes prices of various default-free
zero-coupon bonds ($100 face value):
Maturity (years)
1
2
3
4
5
Price (per $100 face value)
$96.95
$92.52
$88.00
$83.13
$78.10
a. Compute the yield to maturity for each bond.
b. Plot the zero-coupon yield curve (for the first five
years).
c. Is the yield curve upward sloping, downward sloping, or
flat?
Note:
Assume annual compounding.
a. Compute the yield to maturity for each bond.
The yield on the 1-year bond...

(1) Please explain what it means to the yield to maturity on a
10-year Treasury bond relative to that on a 1-year T-bond, when a
yield curve is upward sloping?
(2) Could you explain what factors help make the yield curve
upward sloping and how?

The following table summarizes prices of various default-free
zero-coupon bonds (expressed as a percentage of the face
value):
Maturity (years)
1
2
3
4
5
Price (per $100 face value)
$95.2795.27
$90.8890.88
$86.3686.36
$81.6481.64
$76.4576.45
a. Compute the yield to maturity for each
bond.
b. Plot the zero-coupon yield curve (for the
first five years).
c. Is the yield curve upward sloping,
downward sloping, or flat?

The following table summarizes prices of various default-free,
zero-coupon bonds (expressed as a percentage of face value):
Maturity (years) 1 2 3 4 5
Price (per $100 face value) $95.51 $91.05 $86.38 $81.65
$76.51
a. Compute the yield to maturity for each bond.
b. Plot the zero-coupon yield curve for the first five
years.
c. Is the yield curve upward sloping, downward sloping, or
flat.

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...

The current yield curve for Treasury zero-coupon bonds is as
follows:
Maturity YTM
1)7%
2 )6%
3) 8%
If the market expectations are accurate, what will the two-year
zero coupon yield be one year from now? Answer in percentages, with
two decimal places.

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