PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Textbook Question
Chapter 3, Problem 28PS
Term-structure theories Look again at the spot interest rates shown in Problem 24. What can you deduce about the one-year spot interest rate in three years if:
- a. The expectations theory of term structure is right?
- b. Investing in long-term bonds carries additional risks?
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d. If you hold the bonds for one year, and interest rates do not change, what total rate of return will you earn, assuming that you pay the market price? Why is this different from the current yield and YTM?
After recently receiving a bonus, you have decided to add some bonds to your investment portfolio. You have narrowed your choice down to the following bonds (assume semiannual payments):
a. Using the PRICE function, calculate the intrinsic value of each bond. Is either bond currently undervalued? How much accrued interest would you have to pay for each bond? b. Using the YIELD function, calculate the yield to maturity of each bond using the current market prices. c. Calculate the duration and modified duration of each bond.d. Which bond would you rather own if you expect market rates to fall by 2% across the maturity spectrum? What if rates will rise by 2%? Why?
The pure expectations theory, or the expectations hypothesis, asserts that long-term interest rates can be used to
estimate future short-term interest rates.
Based on the pure expectations theory, is the following statement true or false?
A certificate of deposit (CD) for two years will have the same yield as a CD for one year followed by an investment in
another one-year CD after one year
True
False
The yield on a one-year Treasury security is 5.6100%, and the two-year Treasury security has a 8.4200% yield.
Assuming that the pure expectations theory is correct, what is the market's estimate of the one-year Treasury rate
one year from now?
14.3637%
9.6135%
11.3100%
12.8934%
Recall that on a one-year Treasury security the yield is 5.6100% and 8.4200% on a two-year Treasury security.
Suppose the one-year security does not have a maturity risk premium, but the two-year security does and it is
0.2000%. What is the market's estimate of the one-year Treasury rate one year from now?
12.4260%…
Chapter 3 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 3 - (PRICE) In February 2009, Treasury 8.5s of 2020...Ch. 3 - (YLD) On the same day, Treasury 3.5s of 2018 were...Ch. 3 - (DURATION) What was the duration of the Treasury...Ch. 3 - (MDURATION) What was the modified duration of the...Ch. 3 - Bond prices and yields A 10-year bond is issued...Ch. 3 - Bond prices and yields The following statements...Ch. 3 - Bond prices and yields Construct some simple...Ch. 3 - Bond prices and yields A 10-year German government...Ch. 3 - Bond prices and yields A 10-year German government...Ch. 3 - Bond prices and yields A 10-year U.S. Treasury...
Ch. 3 - Bond returns If a bonds yield to maturity does not...Ch. 3 - Bond returns a. An 8%, five-year bond yields 6%....Ch. 3 - Prob. 10PSCh. 3 - Duration True or false? Explain. a....Ch. 3 - Duration Here are the prices of three bonds with...Ch. 3 - Duration Calculate the durations and volatilities...Ch. 3 - Prob. 14PSCh. 3 - Duration Find the spreadsheet for Table 3.4 in...Ch. 3 - Prob. 16PSCh. 3 - Spot interest rates and yields Which comes first...Ch. 3 - Prob. 18PSCh. 3 - Spot interest rates and yields Look again at Table...Ch. 3 - Prob. 20PSCh. 3 - Spot interest rates and yields Assume annual...Ch. 3 - Spot interest rates and yields A 6% six-year bond...Ch. 3 - Spot interest rates and yields Is the yield on...Ch. 3 - Prob. 24PSCh. 3 - Measuring term structure The following table shows...Ch. 3 - Term-structure theories The one-year spot interest...Ch. 3 - Term-structure theories Look again at the spot...Ch. 3 - Real interest rates The two-year interest rate is...Ch. 3 - Prob. 30PSCh. 3 - Bond ratings A bonds credit rating provides a...Ch. 3 - Prob. 32PSCh. 3 - Price and spot interest rates Find the arbitrage...Ch. 3 - Prob. 34PSCh. 3 - Prices and spot interest rates What spot interest...Ch. 3 - Prices and spot interest rates Look one more time...
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Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
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