Suppose that -7% (n=1), and that future short term (1 year) interest rates are expected to be 5% and 3% (for the subsequent two years). The liquidity premium for n-2 and 3 is 0.25% and 0.35 % respectively. a. Use the liquidity premium theory to calculate for ne2 and 3, and then plot the yield curve using your results. CALCULATE showing all work and ALL formulas that you use. b. Discuss what would be the impact on the yield curve in part a. if future short term rates were suddenly expected to rise.

Suppose that -7% (n=1), and that future short term (1 year) interest rates are expected to be 5% and 3% (for the subsequent two years). The liquidity premium for n-2 and 3 is 0.25% and 0.35 % respectively. a. Use the liquidity premium theory to calculate for ne2 and 3, and then plot the yield curve using your results. CALCULATE showing all work and ALL formulas that you use. b. Discuss what would be the impact on the yield curve in part a. if future short term rates were suddenly expected to rise.

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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a. Given the following holding-period returns, LOADING... , compute the average returns and the standard deviations for the Zemin Corporation and for the market. b. If Zemin's beta is 1.87 and the risk-free rate is 6 percent, what would be an expected return for an investor owning Zemin? (Note: Because the preceding returns are based on monthly data, you will need to annualize the returns to make them comparable with the risk-free rate. For simplicity, you can convert from monthly to yearly returns by multiplying the average monthly returns by 12.) c. How does Zemin's historical average return compare with the return you believe you should expect based on the capital asset pricing model and the firm's systematic risk? Month Zemin Corp. Market 1 5 % 6 % 2 2 1 3 2 0 4 −4 −1 5 4 3 6 3 4
Suppose GE plans to issue a note that matures in 2 years and has a 3.67% coupon rate. If the market yield is 4.91%, what is the market price?
Assume that the risk free-rate yield curve is flat at 4% (with continuous compounding). The payoff from a derivative occurs in 4 years. It is equal to the 6-year rate minus the 2-year rate at this time, applied to a principal of $10 million with both rates being continuously compounded. Calculate the value of the derivative. Assume that the volatility for all rates is 20%
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You read in The Wall Street Journal that 60-day T-bills are currently yielding 9.5%. Your brother-in-law, a broker, has given you the following estimates of current interest rate premiums: Inflation premium = 6.5%. Liquidity premium = 1.15%. Maturity risk premium = 2.50%. Default risk premium = 2.22%. On the basis of these data, the real risk-free rate of return is?
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Suppose that the current 6-month, 1-year, 1.5-year and 2-year interest rates are 2.2%,3%, 3.5% and 3.75%, respectively. a) Calculate the prices of a 1-year and 2-year Treasury bonds. In each case, assumethe face value of £100 and the coupon rate of 5% per annum and that coupons arepaid semi-annually. Assume continuous compounding. Compare the obtainedresults. Are they consistent with your expectations? b) Calculate the par yield on the 1-year bond with semi-annual coupons

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