Assume the zero-coupon yields on default-free securities are as summarized in the following table: (Click on the following icon in order to copy its contents into a spreadsheet.) Maturity (years) Zero-coupon YTM 1 6.70% 2 7.10% 3 7.30% 4 7.70% 5 8.00% What is the price of a three-year, default-free security with a face value of $1,000 and an annual coupon rate of 5%? What is the yield to maturity for this bond? What is the price of a three-year, default-free security with a face value of $1,000 and an annual coupon rate of 5%? The price is $ (Round to the nearest cent.)

You observe the following yield curve for Treasury securities: Maturity Yield 1 Year 4.80% 2 Years 6.00% 3 Years 6.70% 4 Years 7.20% 5 Years 7.90% Assume that the pure expectations hypothesis holds. What does the market expect will be the yield on 4-year securities, 1 year from today? O 8.68% O 8.18% 6.68% 7.68% O 7.18%

The yield curve for default-free zero-coupon bonds is currently as follows: Maturity (years) YTM 1 9.8% 2 10.8 3 11.8 Required: a. What are the implied one-year forward rates? (Do not round intermediate calculations. Round your answers to 2 decimal places.) Maturity (years) YTM Forward rate 1 9.8% 2 3 10.8% 11.8% % % b. Assume that the pure expectations hypothesis of the term structure is correct. If market expectations are accurate, what will the pure yield curve (that is, the yields to maturity on one- and two-year zero-coupon bonds) be next year? O There will be a shift upwards in next year's curve. O There will be a shift downwards in next year's curve. O There will be no change in next year's curve. c. What will be the yield to maturity on two-year zeros? (Do not round intermediate calculations. Round your answers to 2 decimal places.) YTM % d. If you purchase a two-year zero-coupon bond now, what is the expected total rate of return over the next year? (Hint: Compute the current…

Derive the probability distribution of the 1-year HPR on a 30-year U.S. Treasury bond with a 3.0% coupon if it is currently selling at par and the probability distribution of its yield to maturity a year from now is as shown in the table below. (Assume the entire 3.0% coupon is paid at the end of the year rather than every 6 months. Assume a par value of $100.) Note: Leave no cells blank - be certain to enter "0" wherever required. Negative values should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 2 decimal places. Economy Boom Normal Growth Recession Probability 0.30 0.60 0.10 YTM 10.0% 8.0 % 7.0 % Price Capital Gain Coupon Interest HPR % % %

← Suppose a seven-year, $1,000 bond with an 8.4% coupon rate and semiannual coupons is trading with a yield to maturity of 6.65%. a. Is this bond currently trading at a discount, at par, or at a premium? Explain. b. If the yield to maturity of the bond rises to 7.05% (APR with semiannual compounding), what price will the bond trade for? a. Is this bond currently trading at a discount, at par, or at a premium? Explain. (Select the best choice below.) O A. Because the yield to maturity is less than the coupon rate, the bond is trading at a premium. B. Because the yield to maturity is greater than the coupon rate, the bond is trading at par. OC. Because the yield to maturity is greater than the coupon rate, the bond is trading at a premium. D. Because the yield to maturity is less than the coupon rate, the bond is trading at a discount.

The following information is to be used in the following two questions: Using the expectations hypothesis, You observe the following bonds trading in the market: . a 1-year zero priced at $925.00 • a two-year 10% coupon bond trading at a par value of $10,000 What is the one-year interest rate (expressed in %)?

Using the expectations hypothesis theory for the term structure of interest rates, determine the expected return for securities with maturities of two, three, and four years based on the following data. (Input your answers as a percent rounded to 2 decimal places.) 1-year T-bill at beginning of year 1 1-year T-bill at beginning of year 2 1-year T-bill at beginning of year 3 1-year T-bill at beginning of year 4 2-year security 3-year security 4-year security Expected Return % % % Interest Rate 61 98 7% 108

A Treasury STRIP is a zero-coupon US Treasury bond. If the STRIP's yield-to-maturity is 2.5%, par value is $1,000, and 7 years remain until maturity, what is the bond's price today? Use a semi-annual compounding period in your calculations. Enter your answer as a positive number rounded to the nearest penny.

What is the current value of a 30-year bond making semi-annual coupon payments that has a face value of $1,000 and a coupon rate of 8%, if the YTM is 4%, how much does the bond currently sell for? Does the bond sell at a discount, premium, or at face value? Reference the below formulas when solving the problem above: PV = FV / (1+r)^t FV = PV(1+r)^t FVA = PMT(((1+r)^t) -1) / r FVA = PMT((1+(r/12)^t(12))-1)/(r/12) PVA = PMT(((1-(1+r)^-t) / r)) PVA = PMT((1-(1+(r/12))^-t(12)))/(r/12) Bo = PMT ((1-(1+r/2)^-t(2))) / r/2 + FV / (1+r/2)^t(2)

You observe the following prices of Treasury securities per $100 of par value: • a 6-month T-bill sells for 96.1538 • a 1-year T-bill sells for 94.2596 • a 1.5-year 10% coupon T-bond sells for 104.9142 Assume that the pure expectations theory of the term structure holds. a.) Calculate the 6-month, 1-year, and 1.5-year spot rates on a bond-equivalent yield basis.