Suppose the yield curve shows 1 year rates at 5%, 2 year rates
at 10% and...
Suppose the yield curve shows 1 year rates at 5%, 2 year rates
at 10% and 3 year rates at 15%. What is the price of a bond with a
$1000 par value, maturity 3 years, and annual coupon payment of
$50? Show work for credit.
Solutions
Expert Solution
SEE THE IMAGE. ANY DOUBTS,
FEEL FREE TO ASK. THUMBS UP PLEASE
Suppose that the yield curve shows that the one-year bond yield
is 6 percent, the two-year yield is 5 percent, and the three-year
yield is 5 percent. Assume that the risk premium on the one-year
bond is zero, the risk premium on the two-year bond is 1 percent,
and the risk premium on the three-year bond is 2 percent.
a. What are the expected one-year interest rates next year and
the following year?
The expected one-year interest rate next year...
Suppose the U.S. yield curve is flat at 5% and the euro yield
curve is flat at 3%. The current exchange rate is $1.25 per euro.
What will be the swap rate on an agreement to exchange currency
over a 3-year period? The swap will call for the exchange of 2.6
million euros for a given number of dollars in each year. (Do not
round intermediate calculations. Enter your answer in millions
rounded to 4 decimal places.)
Describe the relation between the yield curve of spot rates and
the yield curve of forward rates. Besides providing the basic
relation (increasing, decreasing, independent), please provide the
economic reasoning. You are greatly encouraged to provide any
graphical representation that might help convey the idea. Maximum
200 words. Please write as clear as possible.
Today, interest rates on 1-year T-bonds yield 1.5%, interest
rates on 2-year T-bonds yield 2.55%, and interest rates on 3-year
T-bonds yield 3.4%.
a. If the pure expectations theory is correct, what is the yield
on 1-year T-bonds one year from now? Be sure to use a geometric
average in your calculations. Round your answer to four decimal
places. Do not round intermediate calculations. ________ %
b. If the pure expectations theory is correct, what is the yield
on 2-year...
If you expect the yield curve to invert next year, with spot
rates for maturities of 10-years and above falling and spot rates
for maturities less than 10-years rising. Given your forecast,
explain which of bond Bond A or Bond B you would recommend for a
long position over the upcoming year: Bond A -discount bond with a
duration of 12-years and YTM of 5%; Bond B -coupon rate of 10%, a
duration of 12-years, and a YTM of 5%.
Find the current Daily Yield Curve Rates published by the
Treasury. Plot the Yield curve using a line chart in Excel. Be sure
to label both axes.
Based upon your plot, what do you believe likely to happen to
interest rates in the future?
The 5-year, 8-year, and 10-year zero rates are 5%, 7%, and 8%.
The rates are given per annum with annual compounding.
a) What is the forward rate for an investment initiated 5 years
from today and maturing 10 years from today? (Give your answer per
annum with annual compounding)?
b) What is the forward rate for an investment initiated 5 years
from today and maturing 8 years from today? (Give your answer per
annum with continuous compounding)?
Suppose the U.S. yield curve is flat at 6% and the euro yield curve
is flat at 5%. The current exchange rate is $1.35 per euro. What
will be the swap rate on an agreement to exchange currency over a
3-year period? The swap will call for the exchange of 2.8 million
euros for a given number of dollars in each year. (Do not round
intermediate calculations. Enter your answer in millions rounded to
4 decimal places.)
Suppose the U.S. yield curve is flat at 4% and the euro yield
curve is flat at 3%. The current exchange rate is $1.45 per euro.
What will be the swap rate on an agreement to exchange currency
over a 3-year period? The swap will call for the exchange of 2.3
million euros for a given number of dollars in each year. (Do not
round intermediate calculations. Enter your answer in millions
rounded to 4 decimal places.)
Suppose the U.S. yield curve is flat at 6% and the euro yield
curve is flat at 5%. The current exchange rate is $1.35 per euro.
What will be the swap rate on an agreement to exchange currency
over a 3-year period? The swap will call for the exchange of 2.8
million euros for a given number of dollars in each year.
(Do not round intermediate calculations. Enter your answer
in millions rounded to 4 decimal places.