The current annualized yield on a 1-year STRIPS is 2.4% and the annualized yield on a...

The current annualized yield on a 1-year STRIPS is 2.4% and the annualized yield on a 2-year STRIPS is 2.6%. According to the expectations theory of interest rates, what will be the annualized yield on a 1-year STRIPS one year from now? What would you expect to pay for this STRIPS with a $1,000 face value?

Expert Solution

Annual yield on 1 year strip = 2.4%, Annualized yield on 2 year strip = 2.6%

According expectation theory, investing in two year zero bond is equal to investing in a one zero bond and then investing in one year zero bond one year from now

Hence

( 1 + annual yield on 2 year STRIP)² = ( 1 + annual yield on 1 year STRIP)(1 + annualized yield on 1 year STRIP one year from now)

(1 + 2.6%)² = (1 + 2.4%)(1 + annualized yield on 1 year STRIP one year from now)

(1.026)² = (1.024)(1 + annualized yield on 1 year STRIP one year from now)

(1 + annualized yield on 1 year STRIP one year from now) = (1.026)² / 1.024

(1 + annualized yield on 1 year STRIP one year from now) = 1.052676 / 1.024 = 1.0280039

annualized yield on 1 year STRIP one year from now = 1.0280039 - 1 = 0.0280039 = 2.80039%

Face value of 1 year STRIP one year from now = 1000

Price of STRIP one year from now = 1000 / (1 + annualized yield on 1 year STRIP one year from now) = 1000 / (1 + 2.80039%) = 1000 / 1.0280039 = 972.758 = 972.76

Current price of STRIP = 1000 / (1 + annualized yield on 1 year STRIP one year from now) (1 + annual yield on 1 year STRIP)

= 1000 / ( 1 + annual yield on 2 year STRIP)²

= 1000 / (1 + 2.6%)² = 1000 / 1.026² = 1000 / 1.052676 = 949.959 = 949.96

jeff jeffy answered 1 year ago

4) The current annualized yield on a 2-year STRIPS is 0.13% and the annualized yield on...

4) The current annualized yield on a 2-year STRIPS is 0.13% and the annualized yield on a 3-year STRIPS is 0.15% (WSJ for week ended 7/31/2020). According to the expectations theory of interest rates, what will be the annualized yield on a 1-year STRIPS two years from now? What would you expect to pay for this STRIPS with a $1,000 face value two year from now? note: no excel or calculator. using formula only 5. Suppose you have a 3.25%...

The market price of a 18.00-year STRIPS is $386.00 The yield to maturity is ____%.

What is the yield to maturity on a Treasury STRIPS with 13 yearsto maturity and...

What is the yield to maturity on a Treasury STRIPS with 13 years to maturity and a quoted price of 68.779? A U.S. Treasury bill with 140 days to maturity is quoted at a discount yield of 1.07 percent. What is the bond equivalent yield?

What is the yield to maturity on a Treasury STRIPS with 12 years to maturity and...

What is the yield to maturity on a Treasury STRIPS with 12 years to maturity and a quoted price of 59.705? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

1. Over the next year, what is the current yield, capital gains yield, and total return...

1. Over the next year, what is the current yield, capital gains yield, and total return (or total yield) of a 5 year bond with a 4% YTM and a coupon rate of 5%? Assume the YTM over the next year remains the same. 2. Same question as above, except the YTM at the end of the year has risen to 4.5%. (

A Treasury STRIPS matures in 7 years and has a yield to maturity of 11.9 percent....

A Treasury STRIPS matures in 7 years and has a yield to maturity of 11.9 percent. Assume the par value is $100,000. a. What is the price of the STRIPS? (Do not round intermediate calculations. Round your answer to 2 decimal places.) b. What is the quoted price? (Do not round intermediate calculations. Round your answer to 3 decimal places.)

A zero coupon bond with 2.5 years to maturity has a annualized yield to maturity of...

A zero coupon bond with 2.5 years to maturity has a annualized yield to maturity of 5%. A 3-year maturity annual-pay coupon bond has as face value of $1000 and a 5% coupon rate. The coupon bond also has a yield to maturity of 5%. Please calculate the duration of each bond. Which bond has the higher duration and why? Using the formula that approximates bond price change as a function of the duration, please calculate the price change of...

"Current yield" is to _ as "dividend yield" is to _.

"Current yield" is to ___________ as "dividend yield" is to ___________. Bonds; perpetuities Annuity present value; required return Bonds; stocks Stocks; bonds Required return; total return

1. Given that government 5-year bonds have a current yield to maturity of 3%, with no...

1. Given that government 5-year bonds have a current yield to maturity of 3%, with no other consideration, which of the following investments should you not invest in? Select all correct answers only. Assume all percentages given in this question are per annum. Select one or more: a. I would invest in all investments here. b. Telstra shares paying a dividend yield of 3%. c. Bank term deposit earning 2%. d. Property lease returning 4%. e. NAB bond which has...

A stock's dividend in 1 year is expected to be $2.4. The dividend is expected to...

A stock's dividend in 1 year is expected to be $2.4. The dividend is expected to remain the same indefinitely. The stock's required return is 12%. The estimated value of the stock today is $________. A stock will pay no dividends for the next 3 years. Four years from now, the stock is expected to pay its first dividend in the amount of $2.4. It is expected to pay a dividend of $3 exactly five years from now. The dividend...

Question