The current yield curve for default-free zero-coupon bonds is as follows:
Maturity (years) YTM 1 11.0 % 2 12.0 3 13.0
a. What are the implied one-year forward rates? (Do not round intermediate calculations. Round your answers to 2 decimal places.)
Maturity (years) YTM Forward Rate 1 11.0 % 2 12.0 % % 3 13.0 % %
b. Assume that the pure expectations hypothesis of the term structure is correct. If market expectations are accurate, what will the pure yield curve (that is, the yields to maturity on one- and two-year zero-coupon bonds) be next year?
There will be a shift upwards in next year's curve. There will be a shift downwards in next year's curve. There will be no change in next year's curve.
c-1. If you purchase a two-year zero-coupon bond now, what is the expected total rate of return over the next year? (Hint: Compute the current and expected future prices.) Ignore taxes. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Expected total rate of return %
c-2. If you purchase a three-year zero-coupon bond now, what is the expected total rate of return over the next year? (Hint: Compute the current and expected future prices.) Ignore taxes. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Expected total rate of return %
The current yield curve for default-free zero-coupon bonds is as follows:
| Maturity (years) | YTM | |
| 1 | 11.0 | % |
| 2 | 12.0 | |
| 3 | 13.0 | |
a. What are the implied one-year forward rates? (Do not round intermediate calculations. Round your answers to 2 decimal places.)
| Maturity (years) | YTM | Forward Rate | ||
| 1 | 11.0 | % | ||
| 2 | 12.0 | % | % | |
| 3 | 13.0 | % | % | |
b. Assume that the pure expectations hypothesis of the term structure is correct. If market expectations are accurate, what will the pure yield curve (that is, the yields to maturity on one- and two-year zero-coupon bonds) be next year?
| There will be a shift upwards in next year's curve. | |
| There will be a shift downwards in next year's curve. | |
| There will be no change in next year's curve. |
c-1. If you purchase a two-year zero-coupon bond now, what is the expected total rate of return over the next year? (Hint: Compute the current and expected future prices.) Ignore taxes. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Expected total rate of return %
c-2. If you purchase a three-year zero-coupon bond now, what is the expected total rate of return over the next year? (Hint: Compute the current and expected future prices.) Ignore taxes. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Expected total rate of return %
Related questions
| Below is a list of prices for zero-coupon bonds of various maturities. |
| Maturity (Years) | Price of $1,000 Par Bond (Zero-Coupon) |
| 1 | $988.50 |
| 2 | 891.00 |
| 3 | 844.90 |
| a. | An 5.2% coupon $1,000 par bond pays an annual coupon and will mature in 3 years. What should the yield to maturity on the bond be? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "%" sign in your response.) |
| Yield to maturity | % |
| b. | If at the end of the first year the yield curve flattens out at 6.2%, what will be the 1-year holding-period return on the coupon bond? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "%" sign in your response.) |
| Holding-period return | % |
| ssume you have a one-year investment horizon and are trying to choose among three bonds. All have the same degree of default risk and mature in 8 years. The first is a zero-coupon bond that pays $1,000 at maturity. The second has an 7.9% coupon rate and pays the $79 coupon once per year. The third has a 9.9% coupon rate and pays the $99 coupon once per year. |
| a. | If all three bonds are now priced to yield 7.9% to maturity, what are their prices? (Do not round intermediate calculations. Round your answers to 2 decimal places.) |
| Zero | 7.9% Coupon | 9.9% Coupon | |
| Current prices | $ | $ | $ |
| b-1. | If you expect their yields to maturity to be 7.9% at the beginning of next year, what will their prices be then? (Do not round intermediate calculations. Round your answers to 2 decimal places.) |
| Zero | 7.9% Coupon | 9.9% Coupon | |
| Price one year from now | $ | $ | $ |
| b-2. | What is your rate of return on each bond during the one-year holding period? (Do not round intermediate calculations.Round your answers to 2 decimal places.) |
| Zero | 7.9% Coupon | 9.9% Coupon | |
| Rate of return | % | % | % |
