When the zero curve is upward-sloping, the zero rate for a particular maturity is greater than...

When the zero curve is upward-sloping, the zero rate for a particular maturity is greater than the par yield for that maturity. When the zero curve is downward-sloping the reverse is true. Explain why this is so using FORMULAS

Solutions

Expert Solution

The yield that is derived from the coupon bearing bond is known as the par yield. The zero rate is derived from the zero coupon bonds. When the zero curve is upward sloping, the zero rate is higher than the par yield for the n maturity because yield on the coupon bearing bond is calculated at a discounted value in comparison to the zero coupon bonds. In contrast to it, when the yield curve is downward sloping the yield on the coupon bearing bond is higher than the yield on the zero coupon bond.

Yield on a zero coupon bond formula is:

Yield to Maturity = (Face value / Current bond price)^(1/ years to maturity)-1

Yield to Maturity formula on coupon bearing bond is:

C= Interest Payment

FV = Face Value

Pv= Present Value

t= time period of maturity

Thus, from the above formulas it is clear that yield on the coupon bearing bond is calculated by considering the present value which is the discounted value of cash flows. In contrast, zero coupon bond doesn't consider the discounted values of cash flow.

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

a) Assuming an upward sloping yield curve, explain why the swap rate curve is less than...

a) Assuming an upward sloping yield curve, explain why the swap rate curve is less than the Eurodollar curve for a given maturity. (b) State an alternative instrument to a Eurodollar future that can be used to hedge interest rate risk, and also state the two different settlement options for this instrument.

1. When the short-run marginal cost curve is upward-sloping, The average total cost curve is upward-sloping...

1. When the short-run marginal cost curve is upward-sloping, The average total cost curve is upward-sloping There are diseconomies of scale. The average total cost curve is above the marginal cost curve. Diminishing returns occurs with greater output. 2. Marginal revenue is the change in Group of answer choices Average revenue when output is changed. Average revenue when price is changed. Total revenue when output is changed. Total revenue when price is changed. 3.The shutdown point occurs where price equals...

When the short-run marginal cost curve is upward-sloping, Multiple Choice Diminishing returns occurs with greater output....

When the short-run marginal cost curve is upward-sloping, Multiple Choice Diminishing returns occurs with greater output. There are diseconomies of scale. The average total cost curve is upward-sloping. The average total cost curve is above the marginal cost curve.

Why supply curve is upward sloping?

When the yield curve is upward sloping, for profitability reasons bank managers;

When the yield curve is upward sloping, for profitability reasons bank managers;O fund and lend at the middle of the curveO none of the aboveO fund at the long end and lend at the short end of the curveO fund at the short end and lend at the long end of the curve

Why is the AD-curve downward sloping? 2. Why is the AS-curve upward sloping in the intermediate...

Why is the AD-curve downward sloping? 2. Why is the AS-curve upward sloping in the intermediate run? 3. True or false? Why? “Monetary policy does not affect real output in the Keynesian supply curve model.” 4.“In the classical AS-curve case, an increase in government spending will increase interest rates and real money balances.” Comment on this statement. 5. Comment on the following statement: “In the classical aggregate supply curve model, the economy is always at the full-employment level of...

Why is marginal cost curve upward sloping?

Explain why supply curve are upward sloping?

The supply curve for brownies is upward-sloping. When the price of brownies is $3, the quantity...

The supply curve for brownies is upward-sloping. When the price of brownies is $3, the quantity supplied is 1,000. If the price falls to $1, what happens to producer surplus? Group of answer choices It falls by more than $2,000. It falls by less than $2,000. It rises by more than $2,000. It rises by less than $2,000.

Assuming an upward-sloping supply curve, when aggregate demand increases then: ____, and . What happens to...

Assuming an upward-sloping supply curve, when aggregate demand increases then: ____________________, and ________________. What happens to macro equilibrium?

Subjects