1. Suppose the interest rate on a one-year bond today is 6% per year, the interest rate on a one-year bond one year from now is expected to be 4% per year, and the interest rate on a one-year bond two years from now is expected to be 3% per year. The term premium on a two-year bond is 0.5% per year and the term premium on a three-year bond is 1.0 % per year. In equilibrium, what is the interest rate today on a two-year bond? On a three-year bond? What is the shape of the yield curve?

1. Suppose the interest rate on a one-year bond today is 6% per year, the interest rate on a one-year bond one year from now is expected to be 4% per year, and the interest rate on a one-year bond two years from now is expected to be 3% per year. The term premium on a two-year bond is 0.5% per year and the term premium on a three-year bond is 1.0 % per year. In equilibrium, what is the interest rate today on a two-year bond? On a three-year bond? What is the shape of the yield curve?

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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1.If you buy a 5-week T-bill with a face value of Tk.1,500 for $990, what is the bond equivalent yield, assuming it is not a leap year?
Consider a one-year discount bond that has a present value of P1,500. If the rate of discount is 4 percent, the future value of the bond (the amount the bond pays in one year) is * P1,560.00 P1,540.00 P1,440.00 P1,442.31
What is the price of a $1000 bond that matures in 2 years when: Interest rates are 2%? Interest rates are 8%?
A 10-year bon have an interest rate of 6.50%, while a 15-year bond have an interest rate of 6.0%. Holding the expectation theory, what does the market believe will be the interest rate on a 5-year bond, 10 years from today? 5.00% 5.60% 6.35% 12.50%
18) One-year T-bill rates over the next four years are expected to be 2%, 4%, 6%, and 8%. If four-year T-bonds are yielding 4.5%, what is the liquidity premium on this bond?
you observe that the current 1 - year treasury bill rate is 4% and estimate that it will be 4.6% in one year. your liquidity premium is .3% for holding a bond for 2 years. what is the minimum interest rate you would accept on a 2-year treasury note?
1.suppose a bond has 4 years to maturity and a coupon rate of 6 percent. the bonds yield to maturity is 8 percent. whats the price of the bond today? assume annual payment only.
16) The one-year interest rate over the next 10 years will be 1%, 2%, 3%, 4%, 5%, 6%, 7%, 8%, 9%, and 10%. Using the expectations theory, what will be the interest rates on a five-year bond 17) De
Can the following equation be used to find the value of a bond with N years to maturitythat pays interest once a year? Assume that the bond was issued several years ago.
Q) An $6,000 face-value bond matures in four (4) years and pays 6% per year payable Semiannually An investor wants a 10% return per year compounded Semiannually. How much should the investor pay for the bond? Explain it correctly.
Suppose Home Depot issues 30-year bonds on which it pays a 4.00% (nominal) interest rate. Further, suppose that both Home Depot and the purchasers of its bonds anticipate inflation will average 2.00% during the life of the loan. Now suppose the inflation rate after the loan is made (i.e. after the bond is purchased) is actually 1.00% per annum. It follows that the actual real rate of interest is and, ceteris paribus, are (is) better off than anticipated as a result of the difference between the anticipated and the actual rate of inflation. Select one: a. 2.00%, Bondholders b. 2.00%, Home Depot O c. 3.00%, Bondholders d. 3.00%, Home Depot
Suppose the interest rate on a 1-year government bond is 3.00%, on a 4-year government bond is 3.50% and that on a 6-year government bond is 4.90%. What is the market's forecast for 2-year rates 4 years from now, assuming the pure expectations theory is correct? Show your work.

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