Question

3. Assume that the liquidity of corporate bonds improves a little bit, relative to US Treasury bonds. Given this, we would expect that the yield on US Treasury bonds will _____ and the yield on corporate bonds will _____.

Group of answer choices

rise; rise

rise; fall

fall; rise

fall; fall

4. Analysts predict that short-term interest rates over the next 4 years will be as follows: 5%, 8.5%, 12%, and 1%, respectively. According to expectations theory, the yield on a discount bond with a three year maturity will be ____ and yield on bond with a four year maturity will be ____.

Group of answer choices

8.2%; 7.4%

8.2%; 6.6%

8.5%; 7.4%

8.5%; 6.6%

5. An investor has $100 to invest and she invests in short-term, one year discount bonds over the next 3 years. The forecast for one-year interest rates over the next 3 years is 4.5%, 7.5% and 10.5%. What is the future value of her investment, three years from today?

Group of answer choices

$124.13

$133.35

$137.50

$139.55

Answer 1

3. ANSWER: fall;rise --- Corporate bonds always fetch higher returns, due to default & interest rate risks that need to be compensated.

4.Yield on a discount bond with maturity of 3 yrs.

Equating the total earnings at end of 3 yrs. Holding the 3 nos. 1-Yr. different bonds, with that of holding a 1 3-yr. Discount bond,

(1.05)*(1.085)*(1.12)=(1+x)*(1+x)*(1+x)

(1.05)*(1.085)*(1.12)=(1+x)^3

x= 8.5%

Yield on a discount bond with maturity of 4 yrs.

Equating the total earnings at end of 4 yrs. Holding the 4 nos. 1-Yr. different bonds, with that of holding a 1 4-yr. Discount bond,

(1.05)*(1.085)*(1.12)*(1.01)=(1+x)*(1+x)*(1+x)*(1+x)

(1.05)*(1.085)*(1.12)*(1.01)=(1+x)^4

x= 6.5%

So, the ANSWER is:

8.5%;6.6%

5.Future value of her investment, three years from today=

100*(1.045)*(1.075)*(1.105)=

124.13

So, the ANSWER is:

A. $ 124.13