The return on 1 year zero coupon bond and 4 t h year zero coupon bond, supposing that the term structure will be same as now. Introduction: Bond: It is a type of debt instrument which is issued by the Government or by some corporations. The relevant purpose of issuing bonds is to raise money from the market prevailing under the borrowing agreement. According to this agreement, the issuer of the bond has to pay periodic interest to the holder of the bond on an agreed date.

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Answer 1

Question

Chapter 15, Problem 14PS

a.

Summary Introduction

To calculate: The return on 1 year zero coupon bond and 4^t^h year zero coupon bond, supposing that the term structure will be same as now.

Introduction:

Bond: It is a type of debt instrument which is issued by the Government or by some corporations. The relevant purpose of issuing bonds is to raise money from the market prevailing under the borrowing agreement. According to this agreement, the issuer of the bond has to pay periodic interest to the holder of the bond on an agreed date.

b.

Summary Introduction

To evaluate: The highest expected 1-year return given among the 1-year zero-coupon bond and 4^t^h year zero coupon bond.

Introduction:

Expected rate of return: When an investment is made, the investor expects or anticipates some return. The rate at which this anticipated or expected returns are earned is called expected rate of return. It is also called as anticipated rate of return.

c.

Summary Introduction

To evaluate: The rate of return on 1-year zero-coupon bond and 4-year zero-coupon bond using the expectations hypothesis and indicate the greatest return earner.

Introduction:

Expectations Hypothesis: This is also called as “unbiased expectations hypothesis theory”. This theory is applicable in calculations related to foreign exchange. According to the theory, the forward exchange rate will be equal to the spot rate at the time of delivery on a specific day. This theory can function only when the risk premium is absent.

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Suppose we observe the 3-year Treasury security rate (1R3) to be 8 percent, the expected 1-year rate next year—E(2r1)—to be 4 percent, and the expected one-year rate the following year—E(3r1)—to be 6 percent. If the unbiased expectations theory of the term structure of interest rates holds, what is the 1-year Treasury security rate, 1R1?

Assume that the real risk-free rate of return, k*, is 3%, and it will remain at that level far into the future. Also assume that maturity risk premiums (MRP) increase from zero for bonds that mature in one year or less to a maximum of 1%, and MRP increases by 0.2% for each year to maturity that is greater than one year-that is, MRP equals 0.2% for two-year bond, 0.4% for a three-year bond, and so forth. Following are the expected inflation rates for the next five years: Year Inflation Rate (%) 2017 5 2018 6 2019 7 2020 8 2021 9 a) Compute the interest rate for a one-, two-, three-, four-, and five-year bond. b) If inflation is expected to equal 9% every year after 2021, what should be the interest rate for a 10- and 20-year bond? c) Plot the yield curve for the interest rates you computed in part [a] and [b]. d) Based on the curve (in part c), interpret your findings.

Suppose that we expect $1 million in 3 months and that we want to invest it for a period of 6 months. We also want to set today the rate at which we can invest this money. It is possible to recreate the same result as a forward rate agreement by taking a long position in a 3-month zero-coupon bond and a short position in a 9-month zero-coupon bond True Faux

Answer 2

Question

Chapter 15, Problem 14PS

a.

Summary Introduction

To calculate: The return on 1 year zero coupon bond and 4^t^h year zero coupon bond, supposing that the term structure will be same as now.

Introduction:

Bond: It is a type of debt instrument which is issued by the Government or by some corporations. The relevant purpose of issuing bonds is to raise money from the market prevailing under the borrowing agreement. According to this agreement, the issuer of the bond has to pay periodic interest to the holder of the bond on an agreed date.

b.

Summary Introduction

To evaluate: The highest expected 1-year return given among the 1-year zero-coupon bond and 4^t^h year zero coupon bond.

Introduction:

Expected rate of return: When an investment is made, the investor expects or anticipates some return. The rate at which this anticipated or expected returns are earned is called expected rate of return. It is also called as anticipated rate of return.

c.

Summary Introduction

To evaluate: The rate of return on 1-year zero-coupon bond and 4-year zero-coupon bond using the expectations hypothesis and indicate the greatest return earner.

Introduction:

Expectations Hypothesis: This is also called as “unbiased expectations hypothesis theory”. This theory is applicable in calculations related to foreign exchange. According to the theory, the forward exchange rate will be equal to the spot rate at the time of delivery on a specific day. This theory can function only when the risk premium is absent.

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Answer 3

Question

Chapter 15, Problem 14PS

a.

Summary Introduction

To calculate: The return on 1 year zero coupon bond and 4^t^h year zero coupon bond, supposing that the term structure will be same as now.

Introduction:

Bond: It is a type of debt instrument which is issued by the Government or by some corporations. The relevant purpose of issuing bonds is to raise money from the market prevailing under the borrowing agreement. According to this agreement, the issuer of the bond has to pay periodic interest to the holder of the bond on an agreed date.

b.

Summary Introduction

To evaluate: The highest expected 1-year return given among the 1-year zero-coupon bond and 4^t^h year zero coupon bond.

Introduction:

Expected rate of return: When an investment is made, the investor expects or anticipates some return. The rate at which this anticipated or expected returns are earned is called expected rate of return. It is also called as anticipated rate of return.

c.

Summary Introduction

To evaluate: The rate of return on 1-year zero-coupon bond and 4-year zero-coupon bond using the expectations hypothesis and indicate the greatest return earner.

Introduction:

Expectations Hypothesis: This is also called as “unbiased expectations hypothesis theory”. This theory is applicable in calculations related to foreign exchange. According to the theory, the forward exchange rate will be equal to the spot rate at the time of delivery on a specific day. This theory can function only when the risk premium is absent.

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Answer 4

Question

Chapter 15, Problem 14PS

a.

Summary Introduction

To calculate: The return on 1 year zero coupon bond and 4^t^h year zero coupon bond, supposing that the term structure will be same as now.

Introduction:

Bond: It is a type of debt instrument which is issued by the Government or by some corporations. The relevant purpose of issuing bonds is to raise money from the market prevailing under the borrowing agreement. According to this agreement, the issuer of the bond has to pay periodic interest to the holder of the bond on an agreed date.

b.

Summary Introduction

To evaluate: The highest expected 1-year return given among the 1-year zero-coupon bond and 4^t^h year zero coupon bond.

Introduction:

Expected rate of return: When an investment is made, the investor expects or anticipates some return. The rate at which this anticipated or expected returns are earned is called expected rate of return. It is also called as anticipated rate of return.

c.

Summary Introduction

To evaluate: The rate of return on 1-year zero-coupon bond and 4-year zero-coupon bond using the expectations hypothesis and indicate the greatest return earner.

Introduction:

Expectations Hypothesis: This is also called as “unbiased expectations hypothesis theory”. This theory is applicable in calculations related to foreign exchange. According to the theory, the forward exchange rate will be equal to the spot rate at the time of delivery on a specific day. This theory can function only when the risk premium is absent.

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Answer 5

Chapter 15, Problem 14PS

a.

Summary Introduction

To calculate: The return on 1 year zero coupon bond and 4^t^h year zero coupon bond, supposing that the term structure will be same as now.

Introduction:

Bond: It is a type of debt instrument which is issued by the Government or by some corporations. The relevant purpose of issuing bonds is to raise money from the market prevailing under the borrowing agreement. According to this agreement, the issuer of the bond has to pay periodic interest to the holder of the bond on an agreed date.

b.

Summary Introduction

To evaluate: The highest expected 1-year return given among the 1-year zero-coupon bond and 4^t^h year zero coupon bond.

Introduction:

Expected rate of return: When an investment is made, the investor expects or anticipates some return. The rate at which this anticipated or expected returns are earned is called expected rate of return. It is also called as anticipated rate of return.

c.

Summary Introduction

To evaluate: The rate of return on 1-year zero-coupon bond and 4-year zero-coupon bond using the expectations hypothesis and indicate the greatest return earner.

Introduction:

Expectations Hypothesis: This is also called as “unbiased expectations hypothesis theory”. This theory is applicable in calculations related to foreign exchange. According to the theory, the forward exchange rate will be equal to the spot rate at the time of delivery on a specific day. This theory can function only when the risk premium is absent.

Answer 6

Chapter 15, Problem 14PS

a.

Summary Introduction

To calculate: The return on 1 year zero coupon bond and 4^t^h year zero coupon bond, supposing that the term structure will be same as now.

Introduction:

Bond: It is a type of debt instrument which is issued by the Government or by some corporations. The relevant purpose of issuing bonds is to raise money from the market prevailing under the borrowing agreement. According to this agreement, the issuer of the bond has to pay periodic interest to the holder of the bond on an agreed date.

Answer 7

Chapter 15, Problem 14PS

a.

Summary Introduction

To calculate: The return on 1 year zero coupon bond and 4^t^h year zero coupon bond, supposing that the term structure will be same as now.

Introduction:

Bond: It is a type of debt instrument which is issued by the Government or by some corporations. The relevant purpose of issuing bonds is to raise money from the market prevailing under the borrowing agreement. According to this agreement, the issuer of the bond has to pay periodic interest to the holder of the bond on an agreed date.

Answer 8

b.

Summary Introduction

To evaluate: The highest expected 1-year return given among the 1-year zero-coupon bond and 4^t^h year zero coupon bond.

Introduction:

Expected rate of return: When an investment is made, the investor expects or anticipates some return. The rate at which this anticipated or expected returns are earned is called expected rate of return. It is also called as anticipated rate of return.

Answer 9

b.

Summary Introduction

To evaluate: The highest expected 1-year return given among the 1-year zero-coupon bond and 4^t^h year zero coupon bond.

Introduction:

Expected rate of return: When an investment is made, the investor expects or anticipates some return. The rate at which this anticipated or expected returns are earned is called expected rate of return. It is also called as anticipated rate of return.

Answer 10

c.

Summary Introduction

To evaluate: The rate of return on 1-year zero-coupon bond and 4-year zero-coupon bond using the expectations hypothesis and indicate the greatest return earner.

Introduction:

Expectations Hypothesis: This is also called as “unbiased expectations hypothesis theory”. This theory is applicable in calculations related to foreign exchange. According to the theory, the forward exchange rate will be equal to the spot rate at the time of delivery on a specific day. This theory can function only when the risk premium is absent.

Answer 11

c.

Summary Introduction

To evaluate: The rate of return on 1-year zero-coupon bond and 4-year zero-coupon bond using the expectations hypothesis and indicate the greatest return earner.

Introduction:

Expectations Hypothesis: This is also called as “unbiased expectations hypothesis theory”. This theory is applicable in calculations related to foreign exchange. According to the theory, the forward exchange rate will be equal to the spot rate at the time of delivery on a specific day. This theory can function only when the risk premium is absent.

Answer 12

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Answer 13

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Answer 14

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Answer 15

Ch. 15 - Prob. 1PS Ch. 15 - Prob. 2PS Ch. 15 - Prob. 3PS Ch. 15 - Prob. 4PS Ch. 15 - Prob. 5PS Ch. 15 - Prob. 6PS Ch. 15 - Prob. 7PS Ch. 15 - Prob. 8PS Ch. 15 - Prob. 9PS Ch. 15 - Prob. 10PS

Solution Summary: The author calculates the rate of return for 1-year bond and 4-year coupon bond, assuming the term structure will be the same as now.

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