(a) One of your colleagues is looking at the yield curve expressed by the information below and asks for an explanation as to why it has the current shape. Describe the shape of the term structure presented in the table below. Explain the shape using the two forms of the “biased” expectations theory your answer should define the two forms, and explain why they are referred to as “biased”. Maturity (T) Years r(1) r(2) r(3) r(4) r(5) r(6) r(7) r(8) r(9) r(10) Spot Rate (%) 2.4711 2.4527 2.4745 2.4518 2.3187 2.2438 2.2403 2.3354 2.4373 2.8747 Please refer to attached image. (b) You are considering purchasing a bond between settlement periods with a 6% coupon rate and 4 semi-annual coupon payments remaining. There are 182 days in the coupon period and the days between the last coupon period and the settlement date is 66. What is the accrued interest for this bond? Assume the par value is 100. (c) An investor buys an 8% annual payment bond with 3 years to maturity. The bond has a yield-to-maturity of 7%. Assume the par value is 100. The bond's modified duration is closest to:

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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(a) One of your colleagues is looking at the yield curve expressed by the information below and asks for an explanation as to why it has the current shape. Describe the shape of the term structure presented in the table below. Explain the shape using the two forms of the “biased” expectations theory your answer should define the two forms, and explain why they are referred to as “biased”.

Maturity (T) Years	r(1)	r(2)	r(3)	r(4)	r(5)	r(6)	r(7)	r(8)	r(9)	r(10)
Spot Rate (%)	2.4711	2.4527	2.4745	2.4518	2.3187	2.2438	2.2403	2.3354	2.4373	2.8747

Please refer to attached image.

(b) You are considering purchasing a bond between settlement periods with a 6% coupon rate and 4 semi-annual coupon payments remaining. There are 182 days in the coupon period and the days between the last coupon period and the settlement date is 66.

What is the accrued interest for this bond? Assume the par value is 100.

(c) An investor buys an 8% annual payment bond with 3 years to maturity. The bond has a yield-to-maturity of 7%. Assume the par value is 100.

The bond's modified duration is closest to:

Spot Rate %
3
2.9
2.8
2.7
2.6
2.5
2.4
2.3
2.2
2.1
2
r(1) r(2)
r(3)
Term Structure
r(4) r(5) r(6) r(7)
Year/Term
r(8)
r(9) r(10)

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