Let us know if you got a helpful answer.
Question
Suppose that a risk-neutral investor has a choice between buying a one-year bond paying 4 percent today, a two-year bond paying 5 percent today, a three-year bond paying 5.3 percent today, or a four-year bond paying 5.8 percent today, if a one-year bond purchased one year from now is expected to have an interest rate of 5.5 percent, a one-year bond purchased two years from now is expected to have an interest rate of 6 percent, and a one-year bond purchased three years from now is expected to have an interest rate of 7 percent. If the investor has a 4 year time horizon, which combination would the investor buy? To receive full credit, you must show all calculations.
*** Please show how the yields for the combinations are calculated!
Let us know if you got a helpful answer.
Question
Suppose that a risk-neutral investor has a choice between buying a one-year bond paying 4 percent today, a two-year bond paying 5 percent today, a three-year bond paying 5.3 percent today, or a four-year bond paying 5.8 percent today, if a one-year bond purchased one year from now is expected to have an interest rate of 5.5 percent, a one-year bond purchased two years from now is expected to have an interest rate of 6 percent, and a one-year bond purchased three years from now is expected to have an interest rate of 7 percent. If the investor has a 4 year time horizon, which combination would the investor buy? To receive full credit, you must show all calculations.
*** Please show how the yields for the combinations are calculated!
Related questions
| Bond X is a premium bond making semiannual payments. The bond pays a coupon rate of 11 percent, has a YTM of 9 percent, and has 11 years to maturity. Bond Y is a discount bond making semiannual payments. This bond pays a coupon rate of 9 percent, has a YTM of 11 percent, and also has 11 years to maturity. The bonds have a $1,000 par value. |
| What is the price of each bond today? (Do not round intermediate calculations. Round your answers to 2 decimal places, e.g., 32.16.) |
| Price of Bond X | $ |
| Price of Bond Y | $ |
| If interest rates remain unchanged, what do you expect the price of these bonds to be one year from now? In two years? In seven years? In 9 years? In 11 years? (Do not round intermediate calculations. Round your answers to 2 decimal places, e.g., 32.16.) |
| Price of bond | Bond X | Bond Y |
| One year | $ | $ |
| Two years | $ | $ |
| Seven years | $ | $ |
| 9 years | $ | $ |
| 11 years | $ | $ |
