Speculate as to why an investor may buy into the bond market when prices are dropping. Provide support for your rationale. Determine two reasons that the stated yield to maturity and realized compound yield to maturity of a default free zero coupon bond must always be equal. Support your answer with examples.
Speculate as to why an investor may buy into the bond market when prices are dropping. Provide support for your rationale. Determine two reasons that the stated yield to maturity and realized compound yield to maturity of a default free zero coupon bond must always be equal. Support your answer with examples.
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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 %