Suppose that we expect $1 million in 3 months and that we want to invest it for a period of 6 months. We also want to set today the rate at which we can invest this money. It is possible to recreate the same result as a forward rate agreement by taking a long position in a 3-month zero-coupon bond and a short position in a 9-month zero-coupon bond True Faux

Suppose that we expect $1 million in 3 months and that we want to invest it for a period of 6 months. We also want to set today the rate at which we can invest this money. It is possible to recreate the same result as a forward rate agreement by taking a long position in a 3-month zero-coupon bond and a short position in a 9-month zero-coupon bond True Faux

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter4: Bond Valuation

Section: Chapter Questions

Problem 8MC: Suppose a 10-year, 10% semiannual coupon bond with a par value of 1,000 is currently selling for...

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Consider a long forward contract to purchase a coupon-bearing bond whose current price is $910. We will suppose that the forward contract matures in 9 months. We will also suppose that a coupon payment of $45 is expected after 4 months. We assume that the 4-month and 9-month risk-free interest rates (continuously compounded) are, respectively, 3% and 4% per annum. Explain how an arbitrageur can make profits from this scenario.
Suppose that yield rates on zero coupon bonds are currently 26 for a one-year maturity, 3% for a two-year maturity and 4.% for a three-year maturity (all effective annual rates). Suppose that someone is willing to borrow money from you starting one year from now to be repaid three years from now at an effective annual interest rate of 6.5146438635186%. Construct a transaction in which an arbitrage gain can be obtained. What is your positive net gain for net investment of 0? (net cashflow at t-3) 01345 One possible correct answer is: 0.030250290387703
Suppose you have an obligation to pay € 56 000 in 8 years time. To avoid interest risk you intend to hedge with two bonds. You can use one zero coupon bond that matures 10 years from now, and one bond that pays coupons once a year at the rate of 5% and matures in 3 years with a face value of 100. Assume a flat yield curve. (a) What amount do you have to invest in each of the two bonds during the first year to hedge your obligation if the yield is 5%? What is the payoff at maturity (face value) of your investment in the zero coupon bond? How many units of the coupon bond do you have to buy? (Assume that you can buy any fractional amount of the bonds.) (b) What is the value of your portfolio today if immediately after the investment the market rate falls to 4%? What will be the value in 8 years if interest rates will not change again?
You wish to create a synthetic forward rate agreement in which you would lock in a return between 150 and 310 days. The price of a 150-day zero coupon bond is 0.9823 and the price of 310-day zero coupon bond is 0.9634. Which one of the following method is the correct method to create the synthetic FRA? Explain. [Professor’s note: This is a challenging questions]. A) Borrow one 150-day bond and invest in 1.02 of the 310-day bondsB) Borrow two 150-day bonds and invest in 0.98 of the 310-day bonds C) Lend one of the 150-day bonds and borrow 1.02 of the 310-day bonds D) Lend two of the 150-day bonds and borrow 0.98 of the 310-day bonds
Suppose that you buy a TIPS (inflation-indexed) bond with a 1-year maturity and a coupon of 2% paid annually. Assume you buy the bond at its face value of $1,000, and the inflation rate is 10%. a. What will be your cash flow at the end of the year? (Do not round intermediate calculations. Round your answer to 2 decimal places.) b. What will be your real return? c. What will be your nominal return? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
Assume that the Pure Expectations Theory of the term structure is correct. Also assume that the interest rate today on a 9-year security is 6.40%, while the interest rate today on a 15-year security is 8.00%. Finally assume that the interest rate on a 3-year security to be bought at Year 9 and held over Years 10, 11, and 12 is 6.80%. Given this information, determine the average annual return that investors today must expect that they will receive from investing in a 3-year security in 12 Years (that is, buying the security at Year 12 and holding it over Years 13, 14, and 15). O 13.00% O 12.50% 13.50% O 12.00% O 14.00%
Suppose the interest rate on a 1-year government bond is 3.00%, on a 4-year government bond is 3.50% and that on a 6-year government bond is 4.90%. What is the market's forecast for 2-year rates 4 years from now, assuming the pure expectations theory is correct? Show your work.
Suppose we observe the 3-year Treasury security rate (1R3) to be 8 percent, the expected 1-year rate next year—E(2r1)—to be 4 percent, and the expected one-year rate the following year—E(3r1)—to be 6 percent. If the unbiased expectations theory of the term structure of interest rates holds, what is the 1-year Treasury security rate, 1R1? (Round your answer to 2 decimal places.)
You can enter into a forward contract for a bond with a maturity in one year months that pays a coupon payment of $25 every six months. The bond has a forward price of $930. The current zero coupon rate for 6 months is 4% annually and the zero coupon risk free rate for one year is 5% annually (assume continuous compounding). The current price of the bond is $943. Use the equilibrium forward price equation (F=Sert) adjusted for both coupon payments to see if an arbitrage opportunity exists. If arbitrage is possible, explain the arbitrage opportunity that exists and show how the profit can be earned – make sure to explain every step in detail in realizing the profit and establishing the arbitrage. If arbitrage is not possible, show how you know it is not possible. ANSWER IN TYPING OTHER WISE DOWNVOTE YOU
You want to invest in a risk-free investment for the next 3 years. You can invest in a 3-year zero coupon bond or you can invest in a 1-year zero coupon bond now, then in one year from now invest in a 2- year zero coupon bond. The spot interest rate on the 3-year bond is 3.25%. The spot interest rate on the 1-year bond is 2%. What spot interest rate do you expect to earn on a 2-year bond in one year from now?
and the effective annual interest rate on a two-year zero coupon 6.4.5 The effective annual yield on a one-year zero coupon bond is 80, and the effective annual interest rate on a two-year zero coupon bond is 8.5%. You are able to arrange a one-year forward loan rate i for a one-year period. Suppose that under these conditions it is possible to make a riskless profit with the following strategy: (i) borrow amount 1 for one year at 8% effective annual, (ii) invest amount 1 for 2 years at 8.5% per year effective annual, (iii) arrange a one-year forward one-year length loan of amount 1.08 at rate i (starting one year from now) and repay the loan in (i), (iv) use the proceeds from (ii) to repay loan (iii) at the end of the second year. vai by For what full range of i will this strategy result in a positive amount left over after all 3 transactions are settled at the end of the second year?
Use a different graph for each one and clearly label the axis and the shifting of curves. Explain clearly (in words and on the graph) whether the price and yield to maturity increased or decreased. You buy a bond that pays annual interest payments of 8% of the bond’s face value of $1000. You initially pay $1050 for the bond. You receive an annual interest payment after one year, then sell the bond for $1010. What is your total rate of return on the investment, expressed as a percentage of the purchase price?