Prices and yields to maturity on four zero-coupon bonds: Maturity Yield to Maturity Price 1 Year 5% $952.38 2 Years 6% $890.00 3 Years 7% $816.30 4 Years 8% $735.03 What is the short rate (the one year lending rate at the beginning of the year) that will prevail in the fourth year?

2. Below is a list of five $1,000 par value zero-coupon bonds. Bond Years to Maturity Yield to Maturity A 1 5.00% B 2 6.00% C 3 7.00% D 4 8.00% E 5 9.00% 1) What is the forward 1-year interest rate four years from now? 2) If liquidity premiums are ignored, at what price shall bond C sell for one year from now? (keep two decimals in the final answer) 3) If your investment horizon is three years and you plan to invest in a bond that allows your position free from interest rate risk, which bond would you buy? What risks do you still face in this investment?

Consider the following $1,000 par value zero-coupon bonds: Bond Maturity A 1 BU C D Years until Yield to Interest rate 2 3 Maturity (years) 1 2 3 4 Maturity 8.00% 9.00 9.50 10.00 Required: a. According to the expectations hypothesis, what is the market's expectation of the one-year interest rate three years from now? (Do not round intermediate calculations. Round your answer to 2 decimal places.) b. What are the expected values of next year's yields on bonds with maturities of (a) 1 year; (b) 2 years; (c) 3 years? (Do not round intermediate calculations. Round your answer to 2 decimal places.) YTM Check my work % % % %

Find the duration of a 6% coupon bond making annual coupon payments if it has three years until maturity and a yield to maturity of 7.9%. What is the duration if the yield to maturity is 11.9%? (Do not round intermediate calculations. Round your answers to 4 decimal places.) YTM 7.9% YTM 11.9% YTM Duration