Question

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. 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 7.0%, 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

Price of the coupon bond = Present value of the future cashflows

= 60 / 1.06 + 60 / 1.07*1.06 + 1060 / 1.09*1.07*1.06

= 56.6038 + 52.9007 + 857.412

= $966.917

ytm is given by the below approximate formula,

ytm = [C + ( F - P) / N ] / ( F + P ) / 2

C = Coupon

F = Face value

P = Price

N = No of years till maturity

ytm = [60 +(1000 - 966.917 )/3] / ( 1000 + 966.917 ) /2

= (60 + 11.0277 ) / 983.458

= **7.22%**

Under the expectations hypothesis expected realized compound yield =(1.06 *1.07*1.09) ^1/3

= 1.07326 - 1

=**7.326%**

Price after 1 year = 60 /1.07 + 1060/1.07^2

= 56.0748 + 925.8451

**= 981.9198**

Holding period return =(Ending price - beginning price + coupon ) / beginning price

=(981**.**9198 - 966.917 + 60)/ 966.917

= 75.0028 / 966.917

=7.76%

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
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....

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

Suppose 2-year
Treasury bonds yield 5.5%, while 1-year bonds yield 6%. r* is 1%,
and the maturity risk premium is zero. Use minus sign for any
negative expected inflation rate.
a. Using the expectations
theory, what is the yield on a 1-year bond 1 year from now?
Calculate the yield using a geometric average. Do not round
intermediate calculations. Round your answer to two decimal
places.
________ %
b. What is the expected
inflation rate in Year 1? Do not...

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...

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...

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
___%
____%

A 14-year, $1,000 par value zero-coupon rate bond is to be
issued to yield 7 percent. Use Appendix B for an approximate answer
but calculate your final answer using the formula and financial
calculator methods.
a. What should be the initial price of the bond? (Assume annual
compounding. Do not round intermediate calculations and round your
answer to 2 decimal places.)
b. If immediately upon issue, interest rates
dropped to 6 percent, what would be the value of the zero-coupon...

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