a. Assuming that the expectations hypothesis is valid, compute the expected price of the four-year zero coupon bond shown below at the end of (i) the first year; (ii) the second year; (iii) the third year; (iv) the fourth year. (Do not round intermediate calculations. Round your answers to 2 decimal places.) Beginning of Year Price of Bond Expected Price 1 $ 955.00 2 $ 901.47 3 $ 838.62 4 $ 779.89 b. What is the rate of return of the bond in years 1, 2, 3, and 4? Conclude that the expected return equals the forward rate for each year. (Do not round intermediate calculations. Round your answers to 2 decimal places.) Expected Rate of Beginning of Year Return 1 % 2 % 3 % 4 %

a. Assuming that the expectations hypothesis is valid, compute the expected price of the four-year zero coupon bond shown below at the end of (i) the first year; (ii) the second year; (iii) the third year; (iv) the fourth year. (Do not round intermediate calculations. Round your answers to 2 decimal places.) Beginning of Year Price of Bond Expected Price 1 $ 955.00 2 $ 901.47 3 $ 838.62 4 $ 779.89 b. What is the rate of return of the bond in years 1, 2, 3, and 4? Conclude that the expected return equals the forward rate for each year. (Do not round intermediate calculations. Round your answers to 2 decimal places.) Expected Rate of Beginning of Year Return 1 % 2 % 3 % 4 %

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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a) Assuming that the expectations hypothesis is valid, compute the expected price of the four-year zero coupon bond shown below at the end of (i) the first year, (ii) the second year, (iii) the third year, (iv) the fourth year (round answers to 2 decimal places). Beginning of Year Price of Bond Expected Price 1 $920.90 2 $912.97 3 $826.62 4 $785.62 b) What is the rate of return of the bond in years 1, 2, 3, and 4? Conclude that the expected return equals the forward rate for each year (write answer as percentage, rounded to 2 decimal places). Beginning of Year Expected Rate of Return 1 ?% 2 ?% 3 ?% 4 ?%
Suppose that the current three-year rate (three-year spot rate) and expected one- year T-bill rates over the following years are as follows: 1 R3 = 12% E(271) = 8% E(371) = 10% Using the unbiased expectations theory, calculate the current rates for one- and two-year maturity Treasury securities, i.e., 1 R₁ and 1 R2. Convert your answers to percentages. 1R1 = 17.39%; 1R2 = 12.56% O 1R1 = 20.73; 1R2 = 11.49% O 1R1 = 18.26%; 1R2 = 13.01% O 1R1 = 19.52; 1R2 = 14.74%
There are three bonds that mature at the same time, have the same par value, and are expected to pay their first annual coupon 1 next year. The bonds are detailed in the below table. Bond A B с PV PV PV Present Value B ? ? ? PV B If ca r, then what can we say about the prices of the bonds today? (Enter >, <, or ?) PV C PV Yield to Maturity C r rb Coupon Rate ca с с
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 Price $983.78 865.89 797.92 732.00 660.24 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. Assuming that the expectations hypothesis is valid, compute the expected price of the four-year zero coupon bond shown below at the end of (i) the first year; (ii) the second year; (iii) the third year; (iv) the fourth year. b. What is the rate of return of the bond in years 1, 2, 3, and 4? Conclude that the expected return equals the forward rate for each year. Complete this question by entering your answers in the tabs below. Required A Required B Assuming that the expectations hypothesis is valid, compute the expected price of the four-year zero coupon bond shown below at the end of (i) the first year; (ii) the second year; (iii) the third year; (iv) the fourth year. Note: Do not round intermediate calculations. Round your answers to 2 decimal places. Beginning Price of Bond of Year Expected Price 1 $ 935.90 2 $ 906.47 3 $ 837.12 4 $ 775.39 Required A Required B > B
d Required: a. Assuming that the expectations hypothesis is valid, compute the expected price of the four-year zero coupon bond shown below at the end of (i) the first year; (ii) the second year; (iii) the third year; (iv) the fourth year. b. What is the rate of return of the bond in years 1, 2, 3, and 4? Conclude that the expected return equals the forward rate for each year. Complete this question by entering your answers in the tabs below. Required A Required B Assuming that the expectations hypothesis is valid, compute the expected price of the four-year zero coupon bond shown below at the end of (i) the first year; (ii) the second year; (iii) the third year; (iv) the fourth year. Note: Do not round intermediate calculations. Round your answers to 2 decimal places. Beginning of Year 1 2 3 4 Price of Bond 948.40 921.47 832.62 781.99 $ $ GA $ $ Expected Price $ $ $ 1,150.22 X 1,144.95 X 965.60 x 937.47
The current yield curve for risk-free zero-coupon bonds is as follows: Maturity (years) YTM (%) 1 10 2. 11 3 12 (Round your final answers to 2 decimal places. Enter percentages "as-Is", without the % sign, prices without the $ sign.) a) What are the 1-year forward rates implied by the spot rates? (i.e., f2, f3) 12 % f3 b) If next year, you decide to buy a 2-year zero-coupon bond how much would you need to pay? What will be the YTM offered (next year)? Assume that the expectations hypothesis is correct, and the market expectations are accurate. All Face Values are equal to $1000. Price $ ΥTM c) If you were to buy a 3-year zero-coupon bond today and sell it next year, what would your holding period return be? (Again, assume that expectations theory holds.) HPR
Suppose a bond with a 12% coupon rate and semiannual coupons, has a face value of $1,000, 10 years to maturity and is selling for $1,197.93. Calculate: A. Current yield, and B. YTM if the price of the bond in one year is $2,014.83 STEPS MAY INCLUDE USE OF FINANCIAL CALCULATOR (BA 2 PLUS)
Consider the following $1,000 par value zero-coupon bonds: Bond Years to Maturity Bond B According to the expectations hypothesis, what is the market's expectation of the yield curve one year from now? Specifically, what are the expected values of next year's yields on bonds with maturities of (a) one year? (b) two years? (c) three years? (Do not round intermediate calculations. Round your answers to 2 decimal places.) с D YTM(%) 5.1% Years to Maturity 1 2 3 6.1 6.6 7.1 YTM (%) % % %
Suppose 2-year Treasury bonds yield 4.1%,while 1-year bonds yield 3.2%. r* is 1%, and the maturity risk premium is zero.a. Using the expectations theory, what is the yield on a 1-year bond, 1 year from now?Calculate the yield using a geometric average.b. What is the expected inflation rate in Year 1? Year 2?
You find the following Treasury bond quotes. To calculate the number of years until maturity, assume that it is currently May 2022. All of the bonds have a par value of $1,000 and pay semiannual coupons. Rate ?? 6.252 6.163 Maturity Month/Year May 36 May 41 May 51 Bid 103.5462 104.4952 ?? Asked 103.6340 104.6409 ?? Change Ask Yield +.3015 2.329 +.4293 +.5405 ?? 4.031 In the above table, find the Treasury bond that matures in May 2036. What is the coupon rate for this bond? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.
You find the following Treasury bond quotes. To calculate the number of years until maturity, assume that it is currently May 2022. All of the bonds have a par value of $1,000 and pay semiannual coupons. Rate ?? 6.252 6.163 Maturity Month/Year May 36 May 41 May 51 a. Asked price b. Bid price Bid Asked 103.5462 103.5340 104.4952 104.6409 ?? ?? Change Ask Yield +.3015 5.999 +.4293 ?? +.5405 4.031 a. In the above table, find the Treasury bond that matures in May 2051. What is the asked price of this bond in dollars? Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. b. If the bid-ask spread for this bond is .0654, what is the bid price in dollars? Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.

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