If you expect the yield curve to invert next year, with spot rates for maturities of...

If you expect the yield curve to invert next year, with spot rates for maturities of 10-years and above falling and spot rates for maturities less than 10-years rising. Given your forecast, explain which of bond Bond A or Bond B you would recommend for a long position over the upcoming year: Bond A -discount bond with a duration of 12-years and YTM of 5%; Bond B -coupon rate of 10%, a duration of 12-years, and a YTM of 5%.

Expert Solution

Bond A will have coupon rate less than 5% and Bond B has a coupon rate of 10%. If the duration of the a lower coupon bond is the same as the higher coupon, it implies that the higher coupon bond has a longer maturity. Therefore Bond B has higher maturity. Since yield will decrease for long term bonds and price of that will increase, we would want a bond that has the longer maturity. As the yield will fall for both the bonds given they have maturity of more than 10 years, we need to find the bond which rises the most. When yields fall, price of bond rises. Highest duration bond exhibits the highest rise in price. Duration increases with decrease in coupon. Therefore, Bond B has higher duration and hence choose Bond B

jeff jeffy answered 2 years ago

Describe the relation between the yield curve of spot rates and the yield curve of forward...

Describe the relation between the yield curve of spot rates and the yield curve of forward rates. Besides providing the basic relation (increasing, decreasing, independent), please provide the economic reasoning. You are greatly encouraged to provide any graphical representation that might help convey the idea. Maximum 200 words. Please write as clear as possible.

Suppose the yield curve shows 1 year rates at 5%, 2 year rates at 10% and...

Suppose the yield curve shows 1 year rates at 5%, 2 year rates at 10% and 3 year rates at 15%. What is the price of a bond with a $1000 par value, maturity 3 years, and annual coupon payment of $50? Show work for credit.

Consider the following spot interest rates for maturities ofone, two, three, and four years.r1...

Consider the following spot interest rates for maturities of one, two, three, and four years.r1 = 5.6%r2 = 6.2%r3 = 6.9%r4 = 7.7%What are the following forward rates, wherefk,1 refers to a forward rate beginning in k years and extending for 1 year?f2,1 ______%f3,1 _______%

Consider the following spot interest rates for maturities of one, two, three, and four years. ...

Consider the following spot interest rates for maturities of one, two, three, and four years. r1 = 6.3% r2 = 7.1% r3 = 7.8% r4 = 8.6% What are the following forward rates, where fk,1 refers to a forward rate beginning in k years and extending for 1 year? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.) f2, 1 f3, 1

Assume the one and two year spot rates on the zero curve, Rf (0, 1) and...

Assume the one and two year spot rates on the zero curve, Rf (0, 1) and Rf (0, 2), equal 0.015 and 0.025, respectively. What is the implied one year forward rate one year from now?

Find the current Daily Yield Curve Rates published by the Treasury. Plot the Yield curve using...

Find the current Daily Yield Curve Rates published by the Treasury. Plot the Yield curve using a line chart in Excel. Be sure to label both axes. Based upon your plot, what do you believe likely to happen to interest rates in the future?

Examine yield curve shapes using daily yield curve rates provided by U.S. department of treasury ....

Examine yield curve shapes using daily yield curve rates provided by U.S. department of treasury . a) Report treasure yield rates (1 month, 3 month, 6 month, 1 year, 2 year, 3 year, 5 year, 7 year, 10 year, 20 year, 30 year) on Jan. 02, 2014, Jan. 02, 2015, Jan. 04, 2016, Jan. 03, 2017, Jan. 02, 2018, Jan. 02, 2019, and Sep. 02, 2019. b) Compute each term spreads for seven term structures. c) Plot seven yield curves...

Based on current economic conditions, you expect the yield curve (i.e. the 10y – 3m spread...

Based on current economic conditions, you expect the yield curve (i.e. the 10y – 3m spread on Treasuries) to flatten (i.e., 3m up, 10y down). Do you think that this would be a good or bad time to invest in 15-year mortgage fixed-rate agency pass-throughs? Why?

The current term structure is flat. You expect interest rates to rise sharply over the next...

The current term structure is flat. You expect interest rates to rise sharply over the next years. Select the best strategy from the ones given below. (a) Buy bonds with a long duration. (b) Buy bonds with a lot of convexity. (c) Short-sell bonds with a long duration.

1.The yield of a one-year bond this year equals to 6.5%, and people expect the yield...

1.The yield of a one-year bond this year equals to 6.5%, and people expect the yield of a one-year bond to remain the same on the second year but fall to 5% on the third year. Also, people also require a 0.25% term premium for each additional year of bond maturity. a.Calculate the yield of a two-year bond and a three-year bond according to the theory of liquidity premium. Compare the yields of the three-year bond, two-year bond, and one-year...

Question