6.00% 5.50% 5.00% 4.50% 4.00% 3.50% 3.00% Yield Curve Consider the previous question with the same yield curve. Now suppose I tell you that market participants are risk averse. They require a liquidity premium of 0.50% to hold the 2-year bond, a liquidity premium of 1.00% to hold the 3-year bond, and a liquidity premium of 1.50% to hold the 4-year bond. Then, according to the liquidity preference theory, the market's expectation of the one-year interest rate on July 1st, 2023 is 4 percent. Moreover, the market's expectation of the three-year interest rate on July 1st, 2023 is percent.

6.00% 5.50% 5.00% 4.50% 4.00% 3.50% 3.00% Yield Curve Consider the previous question with the same yield curve. Now suppose I tell you that market participants are risk averse. They require a liquidity premium of 0.50% to hold the 2-year bond, a liquidity premium of 1.00% to hold the 3-year bond, and a liquidity premium of 1.50% to hold the 4-year bond. Then, according to the liquidity preference theory, the market's expectation of the one-year interest rate on July 1st, 2023 is 4 percent. Moreover, the market's expectation of the three-year interest rate on July 1st, 2023 is percent.

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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Consider the following pure discount bonds with face value $1,000: Maturity Price 1 952.38 2 898.47 3 847.62 4 799.64 5 754.38 a). Find the spot rates and draw a yield curve.b). Assume that there is a constant liquidty premium that is equal to 1% across all maturities. Find the forward rates and the expected one period future interest rates.
Q1-6. Which of the following statements are TRUE about zero-coupon bonds? I. If the market interest rate is the same as YTM, a zero-coupon bond will be traded at Par. II. Given the same principal, one with longer maturity should have higher interest rate risk. III. Given the same maturity, one with lower principal will have higher reinvestment risk. IV. Given the same market price, smaller capital is needed to (delta) hedge a bond portfolio with a zero coupon bond than with a coupon bond.
Which of the following statements regarding bonds and their terms is FALSE? *** OA. When we calculate a bond's yield to maturity by solving the formula, Coupon Coupon Coupon + Face Price of an n-period bond = (1 + )" + + + MA (1+)¹ (1+)² the yield we compute will be a rate per coupon interval. OB. The internal rate of return (IRR) of an investment in a zero-coupon bond is the rate of return that investors will earn on their money if they buy a default - free bond at its current price and hold it to maturity. OC. The yield to maturity of a bond is the discount rate that sets the future value (FV) of the promised bond payments equal to the current market price of the bond. OD. Financial professionals also use the term spot interest rates to refer to the default - free zero- coupon yields.
You are given the following data: Real Risk-Free Rate 4% Constant inflation premium 7% Maturity risk premium 1% Default risk premium for AAA bonds 3% Liquidity premium for long term T bonds 2% Assume that a highly liquid market does not exist for long term bonds, and the expected rate of inflation is constant. Given these conditions: a. nominal risk-free rate for T bills is? b. the rate of the long term treasury bonds is?
The risk free rate is 1.7%, inflation is expected to be 3.5%, a corporate bond has a yield rate of 8.7%, which includes a 1% liquidity premium. What is the default risk premium? (ignore the maturity risk) Group of answer choices a)4.2% b)2.5% c)3.5% d)Not enough information
What relationship between the required return (ytm) and the coupon interest will cause a bond to: a) Be priced at a discount¿ FALL2022 b) Be priced at a premium? c) Be priced at its par value?
Suppose you observe the following situation: Security Beta Expected Return Pete Corp. 1.70 0.180 Repete Col 1.39 0.153 What is the risk-free rate? (Do not round intermediate calculations. Round the final answer to 3 decimal places) Risk-free rate % Assume these securities are correctly priced. Based on the CAPM, what is the expected return on the market? (Do not round intermediate calculations. Round the final answers to 2 decimal places.) Expected Return on Market Pete Corp. Repete Co.%
The risk-free rate on long-term Treasury bonds is 6.04%. Assume thatthe market risk premium is 5%. What is the required return on the market? Now use the SML equation to calculate the two companies’ requiredreturns.
Consider a risk-neutral investor which is faced with the following two investments for their $1,000: - a riskless (or risk-free) bond paying a interest rate i=3% - A risky bond, which may pay back with probability 90%, and not pay with probability 10% What is the risk premium x that the risky bond should pay?
D3) Currently, the market interest rate on a bond is 10%. Yield-to-Maturity is a return you can reliaze when you are investing in a bond until its maturity. If you decide to sell the bond before the maturity, what would be your realized return like? and why?
Suppose you observe the following situation: Security Beta Expected Return Pete Corp. 1.70 0.180 Repete Co. 1.39 0.153 What is the risk - free rate? (Do not round intermediate calculations. Round the final answer to 3 decimal places.) Risk - free rate % Assume these securities are correctly priced. Based on the CAPM, what is the expected return on the market? (Do not round intermediate calculations. Round the final answers to 2 decimal places.) Expected Return on Market Pete Corp. % Repete Co. %
h. A bondholder with a short-term bond is exposed to ___________ interest rate risk thanwhen owing a long-term bond.i. When interest rates __________, the market required rates of return ________, and thebond prices will ________.j. If interest rates increase after a bond issue, the yield-to-maturity will ______,

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