1. Use the table below to find the short rate that will prevail in the fourth year. Confirm that the discount factor on the 4-year zero is a geometric average of 1 + the short rates in the next 4 years. Maturity (years) 1 2 3 4 Yield to Maturity (%) 5% 6% 7% 8%

1. Use the table below to find the short rate that will prevail in the fourth year. Confirm that the discount factor on the 4-year zero is a geometric average of 1 + the short rates in the next 4 years. Maturity (years) 1 2 3 4 Yield to Maturity (%) 5% 6% 7% 8%

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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Concept explainers

Treasury Market

On-the-run securities are the most recently issued securities in the market depth and are therefore traded at some premium. The off-the-run securities are the ones issued just before the most recent ones. The on-the-run securities have a lower yield to the investor than the off-the-run securities.

Question

1. Use the table below to find the short rate that will prevail in the fourth year. Confirm that the discount
factor on the 4-year zero is a geometric average of 1 + the short rates in the next 4 years.
Maturity (years)
1
2
3
4
Yield to Maturity (%)
5%
6%
7%
8%

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