Question

25

Term (years)	Today's Rate
1	2.11%
2	2.30%
3	2.48%

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)

26

Term (years)	Today's Rate
1	2.07%
2	2.29%
3	2.52%

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

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

27

Bond A has the following features:

         Face value = $1,000,       

Coupon Rate = 9%,       

Maturity = 9 years, Yearly coupons

         The market interest rate is 4.56%

         If interest rates remain at 4.56%, what will the price of bond A be in year 1?

28

How much would you pay today for a bond that has a face value of $1,000, and annual coupon of $74 and a maturity of 9 years? (=what is the price of the bond?)

         The annual interest rate is 6.44%?

29

Given the following information, what is TODAY’s stock price?

Today’s Dividend =	$4.63
Expected Growth rate in dividends =	2.82
Discount Rate (Required return) =	5.68

Calculate your answer to the nearest penny (e.g., 2.51)

30

Given the following information, what is the percentage capital gain/loss between today and period 1?

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

If there is a loss indicate this by using a negative number (e.g., -4.29)

Today’s Dividend =	$2.02
Expected Growth rate in dividends =	4.19
Discount Rate (Required return) =	7.62

Answer 1

1)

(1 + 3 year spot rate)³ = (1 + 1 year spot rate) * (1 + Expected 2 year forward rate 1 year from now)²

(1 + 2.48%)³ = (1 + 2.11%) * (1 + Expected 2 year forward rate 1 year from now)²

(1 + Expected 2 year forward rate 1 year from now)² =  (1 + 2.48%)³ / (1 + 2.11%)

(1 + Expected 2 year forward rate 1 year from now)² = 1.054020

(1 + Expected 2 year forward rate 1 year from now) = (1.054020)^{(1 / 2)}

(1 + Expected 2 year forward rate 1 year from now) = 1.026655

Expected 2 year forward rate 1 year from now = 2.67%

2)

(1 + 3 year spot rate)³ = (1 + 2 year spot rate)² * (1 + Expected 1 year forward rate 2 years from now)

(1 + 2.52%)³ = (1 + 2.29%)² * (1 + Expected 1 year forward rate 2 years from now)

(1 + Expected 1 year forward rate 2 years from now)=  (1 + 2.52%)³ / (1 + 2.29%)²

(1 + Expected 1 year forward rate 2 years from now)= 1.029815

Expected 1 year forward rate 2 years from now = 2.98%

3)

No of periods = 9 years

Coupon per period = (Coupon rate / No of coupon payments per year) * Par value

Coupon per period = (9% / 2) * $1000

Coupon per period = $90

Price of the bond in 1 year with no of periods = 8

Bond Price = Coupon / (1 + YTM)^period + Par value / (1 + YTM)^period

Bond Price = $90 / (1 + 4.56%)¹ + $90 / (1 + 4.56%)² + ...+ $90 / (1 + 4.56%)⁸ + $1000 / (1 + 4.56%)⁸

Using PVIFA = ((1 - (1 + Interest rate)^{- no of periods}) / interest rate) to value coupons

Bond Price = $90 * (1 - (1 + 4.56%)^-8) / (4.56%) + $1000 / (1 + 4.56%)⁸

Bond Price in year 1= $1292.14

4)

Bond Price = Coupon / (1 + YTM)^period + Par value / (1 + YTM)^period

Bond Price = $74 / (1 + 6.44%)¹ + $74 / (1 + 6.44%)² + ...+ $74 / (1 + 6.44%)⁹ + $1000 / (1 + 6.44%)⁹

Using PVIFA = ((1 - (1 + Interest rate)^{- no of periods}) / interest rate) to value coupons

Bond Price = $74 * (1 - (1 + 6.44%)^-9) / (6.44%) + $1000 / (1 + 6.44%)⁹

Bond Price = $1064.06

5)

Stock price = Current Dividend * (1 + growth rate) / (Required return - growth rate)

Stock price = $4.63 * (1 + 2.82%) / (5.68% - 2.82%)

Stock price = $166.45

6)

Current Stock price = Current Dividend * (1 + growth rate) / (Required return - growth rate)

Current tock price = $2.02 * (1 + 4.19%) / (7.62% - 4.19%)

Current Stock price = $61.36

Stock price 1 year from now = Current Dividend * (1 + growth rate)² / (Required return - growth rate)

Stock price 1 year from now = $2.02 * (1 + 4.19%)² / (7.62% - 4.19%)

Stock price 1 year from now = $63.93

Percentage capital gain / loss = (Stock price 1 year from now - Current Stock price) / Current Stock price

Percentage capital gain / loss = ($63.93 - $61.36) / $61.36

Percentage capital gain / loss = 4.19%

Percentage capital gain = 4.19%