Using the information from the prior problem, what rate (in %s) do you expect a 5-year bond to have? From Prior: You observe that there is a one-year Treasury bond with a yield of 3.0%. You also assume that rates will increase and that the one-year bond will increase by 1.0% each year. For example, you expect the one-year bond in year 2 will be 4.0% and 5.0% in year 3.

Using the information from the prior problem, what rate (in %s) do you expect a 5-year bond to have? From Prior: You observe that there is a one-year Treasury bond with a yield of 3.0%. You also assume that rates will increase and that the one-year bond will increase by 1.0% each year. For example, you expect the one-year bond in year 2 will be 4.0% and 5.0% in year 3.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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According to the expectations theory, what will be the interest rate on a three-year bond if the two-year term permum is 1.0% while the three year term premium is 2.0%, and a one-year bond has an interest rate of 4% and is expected in have an interest rate of 5% next year and 6% in two year ? Select one: A. 5.0% B. 15.0% C. 4.09 D. 6.0%
Suppose you can observe that 1-year bond interest rate is 4%, 2-year bond interest rate is 8%, and 3-year bond interest rate is 10% at time t. It is also known that the term premium on a 2-year bond is 1% and the term premium on a 3-year bond is 1.5%. a) What are the market's expected 1-year bond interest rates for the next two years from time t? b) How to interpret those expected short-term interest rates? (what would be the "possible" economic meanings in the expected short- term interest rates?) Discuss as least two "candidates" to explain them.
According to the expectations theory, what will be the interest rate on a three-year bond if the two-year term premium is 1.0% while the three-year term premium is 2.0%, and a one-year bond has an interest rate of 4% and is expected to have an interest rate of 5% next year and 6% in two year? Select one: Oa. 6.0% O b. 15.0% Oc. 5.0% O d. 4.0%
Suppose the yield on a two-year-old Treasury bond is 5 percent and the yield on a one-year Treasury bond is a 4 percent. If the maturity risk premium (MRP) on these bonds is zero (0), what is the expected one-year interest rate during the second year (Year 2)?
Suppose the interest rate on a 1-year T-bond is 6.3 % and that on a 3 year T-bond is 7.3 %. Assuming the pure expectations theory is correct, what is the market's forecast for 2-year rates 1 year from now? Enter your answer as a percentage and do not use the % symbol.
Assume that the real risk-free rate is 2% and that the maturityrisk premium is zero. If a 1-year Treasury bond yield is 5% and a 2-year Treasury bondyields 7%, what is the 1-year interest rate that is expected for Year 2? Calculate this yieldusing a geometric average. What inflation rate is expected during Year 2? Comment onwhy the average interest rate during the 2-year period differs from the 1-year interestrate expected for Year 2.
Suppose that you buy a two-year 8% bond at its face value.(a) What will be your total nominal return over the two years if inflation is 3% in the first year and 5% in the second? What will be your total real return? (b) Now suppose that the bond is a TIPS. What will be your total two-year real and nominal returns?
Suppose the current interest rate on a one-year bond is 2% and the current interest rate on a two-year bond is 4%. The term premium on a two-year bond is 1%. According to the expectations hypothesis, what interest rate should we expect on a one-year bond next year? Answer as a percentage to one decimal place and do not include symbols (e.g. $, %, commas) in your answer. Answer:
Let's denote the price of a nonmaturing bond (called a consol) as P. The equation that indicates this price is Pn =-, where I is the annual net income the bond generates and r is the nominal market interest rate. a. Suppose that a bond promises the holder $200 per year forever. The nominal market interest rate is 6 percent. Calculate the bond's current price: S. (Round your answer to the nearest whole dollar.)
(b)You purchase the $110 bond today and sell it off next year at $108. What is its one-year rate of return (assume the bond’s coupon rate is 5% and its face value is $100)? If the expected inflation over the course of the year is 2%, what would the ex-ante real rate of return be for the bond on part (b)?
Consider a 4-years bond with a 8% annual coupon rate and semi-annual payments. Let us suppose that the zero coupon curve rate today with annual compounding is given by the one in Table 1.(a) Calculate the discount factors for all the previous maturities and then the bond price.(b) Calculate the equivalent continuous compounding rates. What do you expect as result for the bond price with these rates? Should it be lower, higher or equal to the one in part (a)? Why? The equivalent continuous compounding rates should be lower than the annual rates. Why?
Consider a two-year bond with a face value $1000 and a coupon rate 4.2%paid annually.(a) On the market, the 2-year interest rate is 3%. What is the fair marketprice for this bond?(b) When the interest rate increases to 5%, what would the bond pricebecome?(c) What if the interest rate falls to 1%?

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