n = 10 r0,0 = 5% u = 1.1 d = 0.9 q = 1 - q = ½ Compute the initial price of a zero-coupon bond (ZCB) that matures at time t=4 and that has face value 100

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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…

Q1. Price and Yield. Yield (%) Price at required yield ( coupon rate/ maturity) 6% / 5 6% / 20 3%/5 3% / 20 0% / 5 0% / 20 year year year year year year 3.00 4.00 5.50 5.90 5.99 6.00 6.01 6.10 7.50 8.00 Assume face value is $100. a. Plot the table. b. What is the shape of the price-yield relationship? c. Describe the general relationship you observe between changes in bond prices and changes in yield to maturity.