Consider the following data for bonds A and B: _price annual cash flows t = 0 t = 1 t = 2 t = 3 A $990 $100 $1,100 В $900 $50 $50 $1,050 Initially assuming a flat yield curve of 10% and the expectations theory of the term structure holds, as such the price of bond A is $1,000 and the price of bond B is $875.65. If you kept everything the same, except for replacing the assumption of the expectations theory with the assumption а. of a liquidity premium theory, calculate the new two-year and three-year spot rates? One-year spot rate is 10%. Assume a liquidity premium of 20 basis points for two-year spot rates and 40 basis points for 3 year spot rates.
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- Suppose there is a large probability that L will default on its debt. For the purpose of this example, assume that the value of Ls operations is 4 million (the value of its debt plus equity). Assume also that its debt consists of 1-year, zero coupon bonds with a face value of 2 million. Finally, assume that Ls volatility, , is 0.60 and that the risk-free rate rRF is 6%.Consider the following pure discount bonds with face value $1,000: Maturity Price 1 952.38 2 898.47 3 847.62 4 799.64 5 754.38 Suppose now that the current one-period interest rate is 5% and that the markets expects future one period interest rates to decline by %0.5 per year.(a). Assume first that the liquidity premium is constant at 1%. Draw a graph with the spot yield curve, the forward rates curve and a curve showing expected future one-period interest rates.(b). Assume next that the liquidity premium increases by 0.5% per year from initially being 1%. Draw a graph with the spot yield curve, the forward rates curve and a curve showing expected future one-period interest rates.Explain what you see from the pricing calculations. How do the two bonds differ? Bond C Bond Price = PV(rate,nper,pmt,fv) Given: n = Period which takes values from 0 to the nth period = 0,1,2,3 & 4 Cn = Coupon payment in the nth period = 10%*$1,000 = $100 YTM = interest rate or required yield = 9.6% P = Par Value of the bond = $1,000 Bond Z Bond Price = PV(rate,nper,pmt,fv) Given: n = Period which takes values from 0 to the nth period = 0,1,2,3 & 4 Cn = Coupon payment in the nth period = 0%*$1,000 = $0.00 YTM = interest rate or required yield = 9.6% P = Par Value of the bond = $1,000 years Bond A Bond Z 4 $1,012.79 $693.04 3 $1,010.02 $759.57 2 $1,006.98 $832.49 1 $1,003.65 $912.41 0 $1,000.00 $1,000.00
- Suppose 2-year Treasury bonds yield 4.1%,while 1-year bonds yield 3.2%. r* is 1%, and the maturity risk premium is zero.a. Using the expectations theory, what is the yield on a 1-year bond, 1 year from now?Calculate the yield using a geometric average.b. What is the expected inflation rate in Year 1? Year 2?You are given the following data: Real Risk-Free Rate 4% Constant inflation premium 7% Maturity risk premium 1% Default risk premium for AAA bonds 3% Liquidity premium for long term T bonds 2% Assume that a highly liquid market does not exist for long term bonds, and the expected rate of inflation is constant. Given these conditions: a. nominal risk-free rate for T bills is? b. the rate of the long term treasury bonds is?Consider a coupon bond, period t = 0 price $900, with payments: t=0 1 2 3 50 50 1050 Discount (zero coupon) bonds of 1, 2 and 3 years maturity (all with maturity value of $1000) sell for respectively, 960, 900, 820 dollars. Is this coupon bond properly priced? If not, design an arbitrage argument to profit by the mispricing.
- This is the entire question! Just answer A,B,C (Don't worry about the numbers for A&B) and answer the rest of the question. Complete the following table by identifying the appropriate corresponding variables used in the equation. Unknown Variable Name A (Bond Semi coupon annul payment, annual coupon payment,Bonds market price) B (Bond's semi coupon, annual coupon payment,par value) $1,000 C Semiannual required return Based on this equation and the data, it is (unreasonable,reasonal) to expect that Oliver’s potential bond investment is currently exhibiting an intrinsic value less than $1,000. Now, consider the situation in which Oliver wants to earn a return of 6.75%, but the bond being considered for purchase offers a coupon rate of 8.75%. Again, assume that the bond pays semiannual interest payments and has three years to maturity. If you round the bond’s intrinsic value to the nearest whole dollar, then its intrinsic value…The risk-free rate on long-term Treasury bonds is 6.04%. Assume thatthe market risk premium is 5%. What is the required return on the market? Now use the SML equation to calculate the two companies’ requiredreturns.Suppose 2-year Treasury bonds yield 4.2%, while 1-year bonds yield 3.4%. r* is 1%, and the maturity risk premium is zero. Negative expected inflation rates, if any, should be indicated by a minus sign. Using the expectations theory, what is the yield on a 1-year bond, 1 year from now? Calculate the yield using a geometric average. Do not round intermediate calculations. Round your answer to two decimal places. % What is the expected inflation rate in Year 1? Do not round intermediate calculations. Round your answer to two decimal places. %What is the expected inflation rate in Year 2? Do not round intermediate calculations. Round your answer to two decimal places. %
- This first table describes prevailing market interest rates. Market Data Yield 0.05 Required: Using the yield above and the information contained in the table below, please calculate the price and duration of the bond as well as all necessary steps. (Use cells A5 to B5 from the given information to complete this question.) Time Until Payment Payment Discounted Payment Weight Time × Weight 1.00 $30.00 2.00 $30.00 3.00 $30.00 4.00 $1,030.00 Price: DurationA corporate bond has a nominal or observed yield of 9.8%. Your sister, the famouseconomist, has given you the following estimates:Inflation-risk premium = 3.00%Default-risk premium = 2.10%Maturity premium = 1.90%Liquidity premium = 0.50%On the basis of these data, what is the best estimate of the real risk-free rate of return?Which of the following statements regarding bonds and their terms is FALSE? *** OA. When we calculate a bond's yield to maturity by solving the formula, Coupon Coupon Coupon + Face Price of an n-period bond = (1 + )" + + + MA (1+)¹ (1+)² the yield we compute will be a rate per coupon interval. OB. The internal rate of return (IRR) of an investment in a zero-coupon bond is the rate of return that investors will earn on their money if they buy a default - free bond at its current price and hold it to maturity. OC. The yield to maturity of a bond is the discount rate that sets the future value (FV) of the promised bond payments equal to the current market price of the bond. OD. Financial professionals also use the term spot interest rates to refer to the default - free zero- coupon yields.