Question

Term (years)	Today's Rate
1	2.04%
2	2.34%
3	2.46%

Based on the expectations hypothesis, what does the market expect the 2 year rate in 1 years to be?

State your answer as a percentage to 2 decimal places (e.g., 4.39)

Given the following information, what is the percentage dividend yield between today and period 1?

Today’s Dividend =	$4.91
Expected Growth rate in dividends =	4.72
Discount Rate (Required return) =	5.12

Calculate your answer to two decimal places (e.g., 2.51)

Answer 1

Part 1:

2 Year after 1 year from Today Rate = [ [ (1 + YTM 3 ) ^ 3 / ( 1 + YTM 1 ) ^ 1 ] ^ ( 1 / 2 ) ] - 1
= [ [ ( 1 + 0.0246 ) ^ 3 / ( 1 + 0.0204 ) ^ 1 ] ^ ( 1 / 2 ) ] - 1
= [ [ ( 1.0246 ) ^ 3 / ( 1.0204 ) ^ 1 ] ^ ( 1 / 2 ) ] - 1
= [ [ 1.0756 / 1.0204 ] ^ ( 1 / 2 ) ] - 1
= [ [ 1.0541 ] ^ ( 1 / 2 ) ] - 1
= [ 1.0267 ] - 1
= 0.0267
= I.e 2.67 %
YTM 3 - Spot rate for 3 Years

YTM 1 - SPot Rate for 1 Year

Part 2:

Div yield = Expected div / Price

Particulars	Amount
D0	$   4.91
Growth rate	4.72%
Ke	5.12%

Price of Stock is nothing but PV of CFs from it.
Price = D1 / [ Ke - g ]
D1 = D0 ( 1 + g )
= $ 4.91 ( 1 + 0.0472 )
= $ 4.91 ( 1.0472 )
= $ 5.14

Price = D1 / [ Ke - g ]
= $ 5.14 / [ 5.12 % - 4.72 % ]
= $ 5.14 / [ 0.4 % ]
= $ 1285.44

Where
D0 = Just Paid Div
D1 = Expected Div after 1 Year
P0 = Price Today
Ke = Required Ret
g = Growth Rate

Div yield = Expected div / Price

= $ 5.14 / $ 1285.44

= 0.004 I.e 0.400%