4. (i) A forward contract written on a bond has 10 months remaining until maturity. The face value of the bond is $1000, and it pays a 7% coupon every 6 months. The final coupon is due immediately prior to the maturity of the forward. The relevant riskless rate of interest is 5%. If the bond is trading at $1025, calculate the theoretical forward price and initial value of the forward contract and explain the forward pricing relationship. (ii) Provide numerical examples of arbitrage strategies for situations where a broker offers a price above, and below the theoretical forward price.

Suppose that a 1-year zero-coupon bond with face value $100 currently sells at $90.44, while a 2-year zero sells at $82.64. You are considering the purchase of a 2-year-maturity bond making annual coupon payments. The face value of the bond is $100, and the coupon rate is 12% per year. Required: a. What is the yield to maturity of the 2-year zero? b. What is the yield to maturity of the 2-year coupon bond? c. What is the forward rate for the second year? d. If the expectations hypothesis is accepted, what are (1) the expected price of the coupon bond at the end of the first year and (2) the expected holding-period return on the coupon bond over the first year? e. Will the expected rate of return be higher or lower if you accept the liquidity preference hypothesis? Complete this question by entering your answers in the tabs below. Required A Required B Required C Required D Required E Will the expected rate of return be higher or lower if you accept the liquidity preference hypothesis?…

Suppose that the prices of zero-coupon bonds with various maturities are given in the following table. The face value of each bond is $1,000. Maturity (Years) 1 2 3 4 5 Required: a. Calculate the forward rate of interest for each year. b. How could you construct a 1-year forward loan beginning in year 3? c. How could you construct a 1-year forward loan beginning in year 4? Required A Price $940.93 Complete this question by entering your answers in the tabs below. 868.39 800.92 735.40 670.48 Required B Maturity (years) 2 3 Calculate the forward rate of interest for each year. Note: Round your answers to 2 decimal places. Required C Forward Rate % % Prov 12 of 12 Next

Suppose you can observe that 1-year bond interest rate is 4%, 2-year bond interest rate is 8%, and 3-year bond interest rate is 10% at time t. It is also known that the term premium on a 2-year bond is 1% and the term premium on a 3-year bond is 1.5%. a) What are the market's expected 1-year bond interest rates for the next two years from time t? b) How to interpret those expected short-term interest rates? (what would be the "possible" economic meanings in the expected short- term interest rates?) Discuss as least two "candidates" to explain them.

A newly issued bond has a maturity of 10 years and pays a 7% coupon rate (with coupon payments coming once annually). The bond sells at par value. (i) What are the convexity and the duration of the bond? (ii) Find the actual price of the bond assuming that its yield to maturity immediately increase from 7% to 8% (with maturity still 10 years). (iii) What price would be predicted by the duration rule? What is the percentage error of that rule? (iv) What price would be predicted by the duration-with-convexity rule? What is the percentage error of that rule?

If you have a coupon bond, its face value is $1,000 and the coupon rate is 4%. Complete the following table, then calculate the rate of return for the bond. If you know that it was purchased at the nominal value, comment on the results. due date return at maturity the price 2 0.02   3 0.04   5 0.06   Present Value Annuity value % n value % n 0.961 0.02 2 1.97 0.02 2 0.925 0.04 2 1.89 0.04 2 0.889 0.04 3 2.78 0.04 3 0.906 0.02 5 4.71 0.02 5 0.747 0.06 5 4.21 0.06 5

4)   A coupon bond pays this amount every 6 months;   $             30.00 bgs         for the number of payments/year;                         2         The bond also pays at maturity the par (face) value;  $       1,000.00         Number of years until maturity                         15         The required return of holders of this bond is;  8.00% bgs     a) What is the PV of the CFs, or what would be the fair price to purchase this bond?                       b) If the required return of holders of this bond is;  6.00% bgs       What is the PV of the CFs, or what would be the fair price to purchase this bond?                       c) If the required return of holders of this bond is;  4.00%         What is the PV of the CFs, or what would be the fair price to purchase this bond?  to purchase this bond?               bgs       d) If the previous bond sells for;  $        (976.00)           What must be the yield to maturity for this bond (aka IRR) ? (to…

If a bond is issued at the price of $10,000 per contract and promises a 5.7% interest every year, the contract will be redeemed by the issuer at a discount after 8 years for $9,200. If the market is offering a return of 4.8% for similar risk securities, what would be the price you are ready to offer for this bond?

Suppose that for a Treasury bond futures contract, the cheapest-to-deliver bond is a 4% coupon bond with a quoted price of 114.50 and conversion factor of 1.3150. The futures contract matures in six months and the next coupon will be paid in six months. There is no accrued interest. The six-month risk-free interest rate is 5%. What is the value of the Treasury bond futures contract?

You enter into a forward contract to buy a 10-year, zero coupon bond that will be issued in one year. The face value of the bond is $1,000 and the 1-year and 11-year spot interest rates are 5.3 percent and 7.3 percent, respectively. a. What is the forward price of your contract? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. Suppose both the 1-year and 11-year spot rates unexpectedly shift downward by 1.5 percent. What is the new price of the forward contract? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Answer is complete but not entirely correct. a. Forward price 585.92 X b. New forward price 682.87 X $ $