A company is promising a coupon payment of $46 in 2.03 years. A risk free government bond of the same maturity is yielding 1.66% per year. The credit spread for the promised payment by the company is 1.24% per year. Both the yield and the spread are stated on a continuously compounded basis. What is the present value of the expected loss on the promised payment?
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- The real risk-free rate, r*, is 1.7%. Inflation is expected toaverage 1.5% a year for the next 4 years, after which time inflation is expected to average4.8% a year. Assume that there is no maturity risk premium. An 11-year corporatebond has a yield of 8.7%, which includes a liquidity premium of 0.3%. What is itsdefault risk premium?B. J. Gautney Enterprises is evaluating a security. One-year Treasury bills are currently paying 5.2 percent. Calculate the investment's expected return and its standard deviation. Should Gautney invest in this security? Probability Return a. 0.05 0.50 0.40 0.05 -5 3 7 8 % % % % The investment's expected return is ___%.You have surplus funds to lend for a 3-year period. Current coupon rates are as follows: a. 10.0% for a one-year instrument, b. 9.8% for a two-year instrument, c. 9.4% for a three-year instrument. Investors expect short-term rates drop by 0.5% during this year and by 1.5% in two years from now. What strategy would be the better decision?
- Consider a long forward contract to purchase a coupon-bearing bond whose current price is $910. We will suppose that the forward contract matures in 9 months. We will also suppose that a coupon payment of $45 is expected after 4 months. We assume that the 4-month and 9-month risk-free interest rates (continuously compounded) are, respectively, 3% and 4% per annum. Explain how an arbitrageur can make profits from this scenario.You are given the following information about the yield curve: the 1-, and 2-year yields are yl = 4.5% and y2 = 5.5%, respectively. A 2-year annual 5% coupon bond with a face value of $1,000 is currently selling for $1,000. Assume the first coupon will not be paid until one year from now. Is there an arbitrage opportunity and, if so, how would you exploit it (assume we cannot trade in fractions of a penny)? A. There is no arbitrage opportunity B. Yes: Buy the bond and fund this by shorting a $50 face value 1-year discount bond and a $1,050 face value 2-year discount bond C Yes: Buy the bond and fund this by shorting a $47.85 face value 1-year discount bond and a $943.38 face value 2-year discount bond D. Yes: Short the bond and buy a $50 face value 1-year discount bond and a $1,050 face value 2-year discount bond E. Yes: Short the bond and buy a $47.85 face value 1-vear discount bond and a $943.38 face value 2-year discount bondAssume that you are given the following historical returns for the Market and Security J. Also assume that the expected risk-free rate for the coming year is 4.0 percent, while the expected market risk premium is 15.0 percent. Given this information, determine the required rate of return for Security J for the coming year, using CAPM. Year 1 2 O21.20% 3 4 5 6 O22.34% O 23.49% O24.63% O24.10% Market 10.00% 12.00% 16.00% 14.00% 12.00% 10.00% Security J 12.00% 14.00% 18.00% 22.00% 18.00% 14.00%
- The yield on a one-year Treasury security is 5.6100%, and the two-year Treasury security has a 6.7320% yield. Assuming that the pure expectations theory is correct, what is the market’s estimate of the one-year Treasury rate one year from now? (Note: Do not round your intermediate calculations.) a 9.9897% b 8.9671% c 7.8659% d 6.686%Suppose there is a large probability that L will default on its debt. For the purpose of this example, assume that the value of Ls operations is 4 million (the value of its debt plus equity). Assume also that its debt consists of 1-year, zero coupon bonds with a face value of 2 million. Finally, assume that Ls volatility, , is 0.60 and that the risk-free rate rRF is 6%.Suppose that yield rates on zero coupon bonds are currently 26 for a one-year maturity, 3% for a two-year maturity and 4.% for a three-year maturity (all effective annual rates). Suppose that someone is willing to borrow money from you starting one year from now to be repaid three years from now at an effective annual interest rate of 6.5146438635186%. Construct a transaction in which an arbitrage gain can be obtained. What is your positive net gain for net investment of 0? (net cashflow at t-3) 01345 One possible correct answer is: 0.030250290387703
- The expected yield on a 2 year security is 7.8%. If the yield on a t-bill maturing in 1 year is 7.2%, what is the yield on a 1 year t-bill maturing 1 year from now? [Remember the return should be the same for investing in 2 one year t-bills or 1 2 year t-bill.] Select one: a. 7.2% b. 9.8% c. 15% d. 7.8%Suppose the term structure is set according to pure expectations and the maturity preference theory. To be specific, investors require no compensation for holding investments with a maturity of one year, but they demand a liquidity premium for holding longer term investments. Given the information below, what are the expected one year rates in one year and in two years? Assume annual interest rates. Spot Liquidity premium rate (basis points) 2.65% 0 3.24% 20 3 3.98% 30The yield on a one-year Treasury security is 4.6900%, and the two-year Treasury security has a 6.3315% yield. Assuming that the pure expectations theory is correct, what is the market's estimate of the one-year Treasury rate one year from now? (Note: Do not round your intermediate calculations.) 6.799% O7.9988% O9.1186% O 10.1585% Recall that on a one-year Treasury security the yield is 4.6900% and 6.3315% on a two-year Treasury security. Suppose the one-year security does not have a maturity risk premium, but the two-year security does and it is 0.15%. What is the market's estimate of the one-year Treasury rate one year from now? (Note: Do not round your intermediate calculations.) O 7.6942% O 8.7714% O9.7716% O 6.5401% Suppose the yield on a two-year Treasury security is 5.83%, and the yield on a five-year Treasury security is 6.20%. Assuming that the pure expectations theory is correct, what is the market's estimate of the three-year Treasury rate two years from now? (Note: Do not…