Question

In: Finance

Consider the following $1,000 par value zero-coupon bonds: Bond Years until Maturity Yield to Maturity A...

Consider the following $1,000 par value zero-coupon bonds:

Bond Years until
Maturity
Yield to Maturity
A 1 7.25 %
B 2 8.25
C 3 8.75
D 4 9.25


a. According to the expectations hypothesis, what is the market’s expectation of the one-year interest rate three years from now? (Do not round intermediate calculations. Round your answer to 2 decimal places.)



b. What are the expected values of next year’s yields on bonds with maturities of (a) 1 year; (b) 2 years; (c) 3 years? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Solutions

Expert Solution

Part (a):

YTM on Zero coupon bonds represents Spot rates.

One year interest rate 3 years from now is the forward rate for 1 year, after 3 years( F3,4).

F3,4= 10.76% as follows:

Part (b):

Next year yield on zero coupon bond is the YTM of the corresponding maturity.

Hence, from the given data,

Next year yield of 1 year maturity= 7.25%

Next year yield of 2 year maturity=8.25%

Next year yield of 3 year maturity=8.75%


Related Solutions

Consider the following $1,000 par value zero-coupon bonds: Bond Years until Maturity Yield to Maturity A...
Consider the following $1,000 par value zero-coupon bonds: Bond Years until Maturity Yield to Maturity A 1 8.50 % B 2 9.50 C 3 10.00 D 4 10.50 a. According to the expectations hypothesis, what is the market’s expectation of the one-year interest rate three years from now? (Do not round intermediate calculations. Round your answer to 2 decimal places.) b. What are the expected values of next year’s yields on bonds with maturities of (a) 1 year; (b) 2...
A zero-coupon bond has a yield to maturity of 9% and a par value of $1,000....
A zero-coupon bond has a yield to maturity of 9% and a par value of $1,000. By convention, zero bonds are assumed to pay $0 semi-annually. If the bond matures in eight years, the bond should sell for a price of _______ today.v.
(Bonds) A zero-coupon bond has a $1,000 par value, 9 years to maturity, and sells for...
(Bonds) A zero-coupon bond has a $1,000 par value, 9 years to maturity, and sells for $527.82. What is its yield to maturity? Assume annual compounding. Record your answer to the nearest 0.01% (no % symbol). E.g., if your answer is 3.455%, record it as 3.46.
A zero-coupon bond has a par value of $1,000 and a yield-to-maturity of 5%. You purchase...
A zero-coupon bond has a par value of $1,000 and a yield-to-maturity of 5%. You purchase the bond when it has exactly 17 years remaining until maturity. You hold the bond for 6 months and then sell it. If the bond's yield-to-maturity is 9% when you sell it, what is your percentage return over this 6-month holding period? When computing bond prices, use a semi-annual compounding period. Enter your answer as a decimal and show 4 decimal places. For example,...
You find a zero coupon bond with a par value of $10,000 and 20 years to maturity. The yield to maturity on this bond is...
You find a zero coupon bond with a par value of $10,000 and 20 years to maturity. The yield to maturity on this bond is 4.2 percent. Assume semiannual compounding periods. What is the price of the bond? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
1. Consider a $1,000 par value bond with a maturity of 8 years and a coupon...
1. Consider a $1,000 par value bond with a maturity of 8 years and a coupon of 7%. If you require a return of 9% on the bond what is the maximum price you would pay for the bond? 2. You have a bond that matures in 20 years with a maturity value of $1,000. If the bond has an 8% semiannual coupon and the market requires a return of 7% on the bond, what is the current market price...
"Consider the following bond: Coupon rate = 11% Maturity = 18 years Par value = $1,000...
"Consider the following bond: Coupon rate = 11% Maturity = 18 years Par value = $1,000 First par call in 13 years Only put date in five years and putable at par value Suppose that the market price for this bond is $1,169. Show that the yield to maturity for this bond is 9.077%. Show that the yield to first par call is 8.793%. Show that the yield to put is 6.942%. Suppose that the call schedule for this bond...
A $1,000 par bond with a 12.25% coupon has 10 years to maturity. If the yield...
A $1,000 par bond with a 12.25% coupon has 10 years to maturity. If the yield to maturity is 12.25%, what is the price of the bond? $1,138.25 $1,047.92 $1,000.00 $889.20
Consider the following two bonds. Bond A: 10-year maturity, 4% coupon rate, $1,000 par value Bond...
Consider the following two bonds. Bond A: 10-year maturity, 4% coupon rate, $1,000 par value Bond B: 5-year maturity, 4% coupon rate, $1,000 par value Assuming that the YTM changes from 6% to 7%, calculate % change in each bond’s price.
Consider a zero coupon bond with three years to maturity, and is currently priced to yield...
Consider a zero coupon bond with three years to maturity, and is currently priced to yield 5%. Calculate the following:  Macaulay duration  Modified duration  Percentage change in price for a 1% increase in the yield to maturity
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT