A 25-year coupon bond pays an annual coupon of 5 and has a face value of 100. If the current price is 100, what is the yield to maturity? (b) The current (year t) price of a 5-year coupon bond is 100. It has a coupon rate of 5%, a yield to maturity of 5% and a face value of 100. In year t +1 news arrives that short term interest rates will be twice as high for the foreseeable future. What is the percentage change in the price of the bond? Why did the bond’s price have to change in this way? (c) The expectations hypothesis says that the yield to maturity on an n year risk free bond equals a constant risk premium plus the expected average of short rates over the life of the bond. Which prediction of this theory is rejected by the data and what amendments to the theory have been proposed in response to this rejection?

A 25-year coupon bond pays an annual coupon of 5 and has a face value of 100. If the current price is 100, what is the yield to maturity? (b) The current (year t) price of a 5-year coupon bond is 100. It has a coupon rate of 5%, a yield to maturity of 5% and a face value of 100. In year t +1 news arrives that short term interest rates will be twice as high for the foreseeable future. What is the percentage change in the price of the bond? Why did the bond’s price have to change in this way? (c) The expectations hypothesis says that the yield to maturity on an n year risk free bond equals a constant risk premium plus the expected average of short rates over the life of the bond. Which prediction of this theory is rejected by the data and what amendments to the theory have been proposed in response to this rejection?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter6: Fixed-income Securities: Characteristics And Valuation

Section: Chapter Questions

Problem 4P

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