4) The interest rate on conventional 1-year Treasury bonds is 7% and the interest rate on 1-year TIPS (Treasury inflation- protected securities) is 2.5%. You have 100,000 to invest in one of them. a) If you expect the average monthly inflation rate to be 0.5%, which bond offers the higher expected rate of return? b) At what inflation rate per month you will be indifferent?

4) The interest rate on conventional 1-year Treasury bonds is 7% and the interest rate on 1-year TIPS (Treasury inflation- protected securities) is 2.5%. You have 100,000 to invest in one of them. a) If you expect the average monthly inflation rate to be 0.5%, which bond offers the higher expected rate of return? b) At what inflation rate per month you will be indifferent?

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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Suppose the yield on a 10-year T-bond is currently 5.05% and that on a 10-year Treasury Inflation Protected Security (TIPS) is 1.80%. Suppose further that the MRP on a 10-year T-bond is 0.90%, that no MRP is required on a TIPS, and that no liquidity premium is required on any T-bond. Given this information, what is the expected rate of inflation over the next 10 years? Disregard cross-product terms, i.e., if averaging is required, use the arithmetic average.
Which of the following bonds would have the greatest percentage increase in value if all interest rates in the economy fall by 1%? 1. 10-year, zero coupon bond. 2. 1-year, 10% coupon bond. 3. 20-year, 5% coupon bond. 4. 20-year, zero coupon bond. 5. 20-year, 10% coupon bond.
Bond J is a 4 percent coupon bond. Bond K is a 12 percent coupon bond. Both bonds have nine years to maturity, make semiannual payments, and have a YTM of 8 percent. If interest rates suddenly rise by 2 percent, what is the percentage price change of these bonds? What if rates suddenly fall by 2 percent instead? What does this problem tell you about the interest rate risk of lower-coupon bonds?
A bond pays $10,000 per year for the next 10 years. The bond costs $90,000 now. Inflation is expected to be 6 percent over the next 10 years. Answer parts (a) and (b). a. What is the current dollar internal rate of return? Use linear interpolation with x, = 1.95% and x, = 2.00% to find your answer. The current dollar internal rate of return is percent. (Type an integer or decimal rounded to two decimal places as needed.) b. What is the real internal rate of return? The real internal rate of return is percent. (Type an integer or decimal rounded to two decimal places as needed.)
One-year Treasury bills currently earn 5.50 percent. You expect that one year from now, one-year Treasury bill rates will increase to 5.75 percent. If the unbiased expectations theory is correct, what should the current rate be on two-year Treasury securities? 5.50% 5.625% 5.75% 11.25%
A 5-year Treasury bond has a 4.35% yield. A 10-year Treasury bond yields 6.5%, and a 10-year corporate bond yields 9.8%. The market expects that inflation will average 2.85% over the next 10 years (IP10 = 2.85%). Assume that there is no maturity risk premium (MRP = 0) and that the annual real risk-free rate, r*, will remain constant over the next 10 years. (Hint: Remember that the default risk premium and the liquidity premium are zero for Treasury securities: DRP = LP = 0.) A 5-year corporate bond has the same default risk premium and liquidity premium as the 10-year corporate bond described. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the question below. Open spreadsheet What is the yield on this 5-year corporate bond? Round your answer to two decimal places. fill in the blank %
1
Assume that the real risk-free rate is 2% and that the maturityrisk premium is zero. If a 1-year Treasury bond yield is 5% and a 2-year Treasury bondyields 7%, what is the 1-year interest rate that is expected for Year 2? Calculate this yieldusing a geometric average. What inflation rate is expected during Year 2? Comment onwhy the average interest rate during the 2-year period differs from the 1-year interestrate expected for Year 2.
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?
PICK ONE: Explain why YOU: Suppose that 6 months after you purchase the bond, the market rate for interest on this type of bond falls to 7.00%. This will cause the (coupon / market price / par value) to (fall / rise). From the issuer’s perspective, the lower interest rate means that he or she would be (worse / better) off issuing new bonds at this lower rate than continuing to pay you 9%.
A 5-year Treasury bond has a 4.25% yield. A 10-year Treasury bond yields 6%, and a 10-year corporate bond yields 8.9%. The market expects that inflation will average 2.7% over the next 10 years (IP10 = 2.7%). Assume that there is no maturity risk premium (MRP = 0) and that the annual real risk-free rate, r*, will remain constant over the next 10 years. (Hint: Remember that the default risk premium and the liquidity premium are zero for Treasury securities: DRP = LP = 0.) A 5-year corporate bond has the same default risk premium and liquidity premium as the 10-year corporate bond described. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the question below. Open spreadsheet What is the yield on this 5-year corporate bond? Round your answer to two decimal places. % Check My Work Reset Problem
A bond that pays no interest is called a zero-coupon bond. A $10,000 zero-coupon bond that matures in 10 years can be purchased today. If the expected annual rate of inflation is 3% and the buyer’s unadjusted MARR is 8%, what is the maximum that should be paid for the bond?

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