1. Assume the following information about a Treasury zero-coupon yield curve today: Maturity (years) Zero rates (%) Maturity (years) Zero rates (%) 2.30 3.50 2.70 3.80 2.90 4.00 3.10 4.20 3.20 4.30 1 2 3 4 6 7 8 9 10 5 All rates above are with continuous compounding. a. Calculate the corresponding rates under semi-annual compounding. b. Calculate the price of a 4-year Treasury bond with face value $1,000 that pays coupon annually at the coupon rate of 4%. c. If the government wants to issue a 5-year bond that pays coupon annually and priced at par (face value $1,000), what should be the amount of each coupon payment?

1. Assume the following information about a Treasury zero-coupon yield curve today: Maturity (years) Zero rates (%) Maturity (years) Zero rates (%) 2.30 3.50 2.70 3.80 2.90 4.00 3.10 4.20 3.20 4.30 1 2 3 4 6 7 8 9 10 5 All rates above are with continuous compounding. a. Calculate the corresponding rates under semi-annual compounding. b. Calculate the price of a 4-year Treasury bond with face value $1,000 that pays coupon annually at the coupon rate of 4%. c. If the government wants to issue a 5-year bond that pays coupon annually and priced at par (face value $1,000), what should be the amount of each coupon payment?

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Suppose you are given the following information about the default-free, coupon-paying yield curve: Maturity (years) Coupon rate (annual payment) YTM a. Use arbitrage to determine the yield to maturity of a two-year zero-coupon bond. b. What is the zero-coupon yield curve for years 1 through 4? Note: Assume annual compounding. a. Use arbitrage to determine the yield to maturity of a two-year zero-coupon bond. The yield to maturity of a two-year, zero-coupon bond is %. (Round to two decimal places.) b. What is the zero-coupon yield curve for years 1 through 4? The yield to maturity for the three-year and four-year zero-coupon bond is found in the same manner as the two-year zero-coupon bond. The yield to maturity on the three-year, zero-coupon bond is %. (Round to two decimal places.) %. (Round to two decimal places.) The yield to maturity on the four-year, zero-coupon bond is Which graph best depicts the yield curve of the zero-coupon bonds? (Select the best choice below.) O A. 8- 7- 6-…
Suppose you are given the following information about the default-free, coupon-paying yield curve: Maturity (years) Coupon rate (annual payment) YTM 1 0.00% 2.587% a. Use arbitrage to determine the yield to maturity of a two-year zero-coupon bond. b. What is the zero-coupon yield curve for years 1 through 4? Note: Assume annual compounding. 2 11.00% 4.008% a. Use arbitrage to determine the yield to maturity of a two-year zero-coupon bond. The yield to maturity of a two-year, zero-coupon bond is %. (Round to two decimal places.) b. What is the zero-coupon yield curve for years 1 through 4? The yield to maturity for the three-year and four-year zero-coupon bond is found in the same manner as the two-year zero-coupon bond. The yield to maturity on the three-year, zero-coupon bond is %. (Round to two decimal places.) The yield to maturity on the four-year, zero-coupon bond is %. (Round to two decimal places.) Which graph best depicts the yield curve of the zero-coupon bonds? (Select the…
As of November 14, 2023, Treasury yields were as follows: 1-year 5.24% 2-year 4.80% 3-year 4.56% 5-year 4.42% 10-year 4.44% 30-year 4.61% Use these yields to answer the questions below. a. What do the rates above imply about the shape of the yield curve? Explain. b. Using the pure expectations theory of the term structure of interest rates, carefully explain how the general shape of the yield curve described in (a) could come about.
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Suppose you believe that the unbiased expectation theory (UET) holds. Then, using the hypothetical yield curve depicted below finds all the implicit forward rates. Spot Rates (or Zero-rates) Maturity 6 month 1 year 1.5 year 2 year 2.5 year 3 year Spot Rate 6.2% 7.1% 7.5% 7.8% 8.6% 8.67%
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Given a yield to maturity of 0.00045629%. Assume the yield to maturity immediately increases 1%. Calculate the new price of the Treasury Bill. Show Work Please.
The pure expectations theory, or the expectations hypothesis, asserts that long-term interest rates can be used to estimate future short-term interest rates. Based on the pure expectations theory, is the following statement true or false? Q1. A certificate of deposit (CD) for two years will have the same yield as a CD for one year followed by an investment in another one-year CD after one year. a. True b. False Q2. The yield on a one-year Treasury security is 4.9200%, and the two-year Treasury security has a 5.9040% yield. Assuming that the pure expectations theory is correct, what is the market’s estimate of the one-year Treasury rate one year from now? (Note: Do not round your intermediate calculations.) a. 5.8627% b. 6.8973% c. 7.8629% d. 8.7596% Q3. Recall that on a one-year Treasury security the yield is 4.9200% and 5.9040% on a two-year Treasury security. Suppose the one-year security does not have a maturity risk premium, but the two-year security does and it is 0.2%. What is…
A.Suppose the real risk-free rate is 3.00%, the average expected future inflation rate is 6.60%, and a maturity risk premium of 0.10% per year to maturity applies, i.e., MRP = 0.10%(t), where t is the number of years to maturity. What rate of return would you expect on a 1-year Treasury security, assuming the pure expectations theory is NOT valid? Disregard cross-product terms, i.e., if averaging is required, use the arithmetic average. a. 9.70% b. 9.12% c. 8.83% d. 8.54% e. 7.47% B. Beranek Corp has $625,000 of assets (which equal total invested capital), and it uses no debt—it is financed only with common equity. The new CFO wants to employ enough debt to raise the total debt to total capital ratio to 40%, using the proceeds from borrowing to buy back common stock at its book value. How much must the firm borrow to achieve the target debt ratio? a. $262,500 b. $202,500 c. $250,000 d. $195,000 e. $212,500
Suppose the real risk-free rate is 3.00%, the average expected future inflation rate is 6.60%, and a maturity risk premium of 0.10% per year to maturity applies, i.e., MRP = 0.10%(t), where t is the number of years to maturity. What rate of return would you expect on a 1-year Treasury security, assuming the pure expectations theory is NOT valid? Disregard cross-product terms, i.e., if averaging is required, use the arithmetic average.
Suppose you are given the following information about the default- free, coupon-paying yield curve: maturity (years) 1 Coupon rate (annual payments) 0% YTM 2 10% 3.000% 4.908% 3 6% 6.840% Use arbitrage to determine the yield to maturity of a two-year and three year zero-coupon bond . (express in percentages, round to whole percentage)

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