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- Suppose we observe the following rates: 1R1= 0.75%, 1R2=1.20%, E(2r1)=0.907%. If the liquidity premium theory of the term structure of interest rates holds, what is the liquidity premium for year 2, L2?Q1. Consider the following par bond (ie coupon rate=yield):Year: 10 and 20 years . Yld 1.50% and 2.0% Q1c. if you hold the 20Y for 1 year, what is your total return from the investment assuming yldcurve does not change ? Hint: your total return comes from coupon collection as well as price appreciation ordepreciationYou will be paying $8,600 a year In tultion expenses at the end of the next two years. Bonds currently yleld 7%. Q. What is the present value and duration of your obligation? b. What maturity zero-coupon bond would Immunize your obligation? c. Suppose you buy a zero-coupon bond with value and duration equal to your obligation. Now suppose that rates immediately Increase to 9%. What happens to your net position, that is, to the difference between the value of the bond and that of your tultion obligation? d. What if rates fall Immediately to 5% ? Complete this question by entering your answers in the tabs below. Required A Required B Required C Required D What is the present value and duration of your obligation? (Do not round intermediate calculations. Round "Present value" to 2 decimal places and "Duration" to 4 decimal places.) \table[[,,,],[Present value,,,,,],[Duration,,years,,,]]
- Consider a bond selling at par with modified duration of 10.6 years and convexity of 210. A 2% decrease in yield would cause the price to increase by 21.2%, according to the duration rule. What would be the percentage price change according to the duration-with-convexity rule? O [A] 21.2% O [B] 25.4% O [C] 17.0% O [D] 10.6%The 30-day T-bill yield is currently 3.10%. You also know that the inflation premium today is 1.80%, the liquidity premium is 0.25%, the maturity risk premium is 0.33% for bonds with 5 years to maturity, and the default risk premium on corporate bonds is averaging about 2.07%. What is the real risk-free rate of return? (A) 0.51% B) 1.05% 1.15% D) 1.30% E 2.25%Assume that you conduct a relative value trade and close it out after 5 days. Your 5-day return is 0.84%. Annualize this return as a Bond Equivalent Yield (BEY). Assume that a year has 365 days. State your answer as a percent, but without the percent sign. So, for example, if your answer was 0.1053, which is 10.53%, you would answer 10.53.
- Suppose the interest rate on a 1-year T-bond is 2.60% and that on a 2-year T-bond is 4.50%. Assume that the pure expectations theory is NOT valid, and the MRP is zero for a 1-year T-bond but 0.30% for a 2-year bond. What is the equilibrium market forecast for 1-year rates 1 year from now? a. 4.7333% b. 5.1110% c. 5.2676% d. 5.5463% e. 5.8250%. Only typing answer Please explain step by stepSuppose the yield on a bond that pays $100 in one year is currently 2%. If interest rates suddenly spike so that newly issued similar 1 year $100 bonds yield 4%, the price of the original bond will fall from 98.04 to 96.15.6. Problem 12-12 Capital Structure Analysis Hagen Horticulture and Supplies Limited has no debt outstanding, and its financial position is given by the following data: Assets (book market) EBIT Cost of equity, r Stock price, P Shares outstanding, n, Tax rate, T The firm is considering selling bonds and simultaneously repurchasing some of its stock. If it moves to a capital structure with 40% debt based on market values, its cost of equity, f,, will increase to 9.57% to reflect the increased risk. Bonds can be sold at a cost, ra, of 7%. Hagen is a no-growth. firm. Hence, all its earnings are paid out as dividends, and earnings are expected to be constant over time. a. What effect would this use of leverage have on the value of the firm? The value of the firm would I $4,000,000 $500,000 8.75% $8 500,000 30% b. What would be the market value of Hagen's equity? Market value of equity=$
- Suppose the continuous forward rate is r(t) = 0.04 + 0.001t when a 8 year zero coupon bond is purchased. Six months later the forward rate is r(t) = 0.03 + 0.0013t and bond is sold. What is the return?Assume that the real risk-free rate of return, k*, is 3%, and it will remain at that level far into the future. Also assume that maturity risk premiums (MRP) increase from zero for bonds that mature in one year or less to a maximum of 1%, and MRP increases by 0.2% for each year to maturity that is greater than one year-that is, MRP equals 0.2% for two-year bond, 0.4% for a three-year bond, and so forth. Following are the expected inflation rates for the next five years: Year Inflation Rate (%) 2017 5 2018 6 2019 7 2020 8 2021 9 a) Compute the interest rate for a one-, two-, three-, four-, and five-year bond. b) If inflation is expected to equal 9% every year after 2021, what should be the interest rate for a 10- and 20-year bond? c) Plot the yield curve for the interest rates you computed in part [a] and [b]. d) Based on the curve (in part c), interpret your findings.Suppose 1-year Treasury bonds yield 3.10% while 2-year T-bonds yield 4.80%. Assuming the pure expectations theory is correct, and thus the maturity risk premium for T-bonds is zero, what is the yield on a 1-year T-bond expected to be one year from now?