PRIN.OF CORPORATE FINANCE >BI<
12th Edition
ISBN: 9781260431230
Author: BREALEY
Publisher: MCG CUSTOM
expand_more
expand_more
format_list_bulleted
Concept explainers
Videos
Question
Chapter 3, Problem 27PS
a)
Summary Introduction
To discuss: One-year spot interest rate in 3 years if the expectation theory of term structure is right.
b)
Summary Introduction
To discuss: The additional risks associated with the investment in long term bonds.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Assuming that the expectation theory is the correct theory of the term structure, calculate the interest rates in the terms structure for maturities of on to five years, and plot the resulting yield curves for the following series of one-year interest rates over the next five year. how would your yield curves change if people preffered shorter-term bonds over longer-term bonds?
i) 5%, 4%，4%， 4%， 4%
hi can explain to me how to solve the question step by step ? TQ
1. Assuming that the expectations theory is the correct theory of the term structure, calculate the interest rates in the term structure for maturities of one to five years, and plot the resulting yield curves for the following series of one-year interest rates over the next five years. how would yields curves change if people preferred short term bonds over long-term bonds?
a. 5%, 7%, 7%, 7%, 7%
b. 5%, 4%, 4%, 4%, 4%
2. If the yield curve suddenly becomes steeper, how would you revise your predictions of interest rates in the future?
Assuming the expectations theory is the correct theoryof the term structure, calculate the interest rates in theterm structure for maturities of one to four years, andplot the resulting yield curves for the following paths ofone-year interest rates over the next four years:a. 5%; 7%; 12%; 12%b. 7%; 5%; 3%; 5%How would your yield curves change if people preferred shorter-term bonds to longer-term bonds?
Chapter 3 Solutions
PRIN.OF CORPORATE FINANCE >BI<
Ch. 3 - (PRICE) In February 2009, Treasury 8.5s of 2020...Ch. 3 - (YLD) On the same day, Treasury 3.5s of 2018 were...Ch. 3 - (DURATION) What was the duration of the Treasury...Ch. 3 - (MDURATION) What was the modified duration of the...Ch. 3 - Prob. 1PSCh. 3 - Bond prices and yields The following statements...Ch. 3 - Prob. 3PSCh. 3 - Bond prices and yields A 10-year German government...Ch. 3 - Bond prices and yields Construct some simple...Ch. 3 - Spot interest rates and yields Which comes first...
Ch. 3 - Prob. 7PSCh. 3 - Spot interest rates and yields Assume annual...Ch. 3 - Prob. 9PSCh. 3 - Prob. 10PSCh. 3 - Duration True or false? Explain. a....Ch. 3 - Duration Calculate the durations and volatilities...Ch. 3 - Term-structure theories The one-year spot interest...Ch. 3 - Real interest rates The two-year interest rate is...Ch. 3 - Duration Here are the prices of three bonds with...Ch. 3 - Prob. 16PSCh. 3 - Prob. 17PSCh. 3 - Spot interest rates and yields A 6% six-year bond...Ch. 3 - Spot interest rates and yields Is the yield on...Ch. 3 - Prob. 20PSCh. 3 - Prob. 21PSCh. 3 - Duration Find the spreadsheet for Table 3.4 in...Ch. 3 - Prob. 23PSCh. 3 - Prob. 25PSCh. 3 - Prob. 26PSCh. 3 - Prob. 27PSCh. 3 - Prob. 28PSCh. 3 - Prob. 29PSCh. 3 - Prices and yields If a bonds yield to maturity...Ch. 3 - Prob. 31PSCh. 3 - Price and spot interest rates Find the arbitrage...Ch. 3 - Prob. 33PSCh. 3 - Prices and spot interest rates What spot interest...Ch. 3 - Prices and spot interest rates Look one more time...
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- What would be the value of the bond described in Part d if, just after it had been issued, the expected inflation rate rose by 3 percentage points, causing investors to require a 13% return? Would we now have a discount or a premium bond? What would happen to the bond’s value if inflation fell and rd declined to 7%? Would we now have a premium or a discount bond? What would happen to the value of the 10-year bond over time if the required rate of return remained at 13%? If it remained at 7%? (Hint: With a financial calculator, enter PMT, I/YR, FV, and N, and then change N to see what happens to the PV as the bond approaches maturity.)arrow_forwardAssuming that the expectations theory is the correct theory of the term structure,calculate the interest rates in the term structure for maturities of one to five years, andplot the resulting yield curves for the following series of one-year interest rates over thenext five years. Please, use compounding interest in your calculations:a. 5%, 7%, 7%, 7%, 7%b. 5%, 4%, 4%, 4%, 4%How would your yield curves change if investors preferred shorter-term bonds overlonger-term bonds?arrow_forwardThe pure expectations theory, or the expectations hypothesis, asserts that long-term interest rates can be used to estimate future short-term interest rates. Based on the pure expectations theory, is the following statement true or false? Q1. A certificate of deposit (CD) for two years will have the same yield as a CD for one year followed by an investment in another one-year CD after one year. a. True b. False Q2. The yield on a one-year Treasury security is 4.9200%, and the two-year Treasury security has a 5.9040% yield. Assuming that the pure expectations theory is correct, what is the market’s estimate of the one-year Treasury rate one year from now? (Note: Do not round your intermediate calculations.) a. 5.8627% b. 6.8973% c. 7.8629% d. 8.7596% Q3. Recall that on a one-year Treasury security the yield is 4.9200% and 5.9040% on a two-year Treasury security. Suppose the one-year security does not have a maturity risk premium, but the two-year security does and it is 0.2%. What is…arrow_forward
- 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.arrow_forwardAccording to the expectations theory, what will be the interest rate on a three-year bond if the two-year term permum is 1.0% while the three year term premium is 2.0%, and a one-year bond has an interest rate of 4% and is expected in have an interest rate of 5% next year and 6% in two year ? Select one: A. 5.0% B. 15.0% C. 4.09 D. 6.0%arrow_forwardRoss Law is pondering on the following data. Three-year Treasury securities currently yield 6%, while 4 year treasury security yield 6.5%. Assume that the expectations theory holds, what does the market believe the rate will be on a 1-year treasury security, three years from now?arrow_forward
- Suppose the current forward curve for one-year rates is the following: Time Period Forward Rate f(0,1) 2.5% f(1,1) 3.6% f(2,1) 4.5% f(3,1) 5.1% Calculate the spot rates for 2-year, 3-years and 4-year spot rates Calculate the forward rates f(1, 2), f(1, 3), and f(2, 2) 3) Use the information to value a 4-year bond that pays 4.5% annual coupons.arrow_forwardSuppose that the interest rate on one-year bonds is currently 4 percent and is expected to be 5 percent in one year and 6 percent in two years. Using the expectations hypothesis, compute the yields on two- and three-year bonds and plot the yield curve.arrow_forwardLynn Parsons is considering investing in either of two outstanding bonds. The bonds both have $1,000 par values and 13% coupon interest rates and pay annual interest. Bond A has exactly 6 years to maturity, and bond B has 16 years to maturity. b.Calculate the present value of bond B if the required rate of return is: (1) 10%, (2) 13%, and (3) 16%. c. From your findings in parts a and b, discuss the relationship between time to maturity and changing required returns. d. If Lynn wanted to minimize interest rate risk, which bond should she purchase? Why? I need all parts and the sub parts answeredarrow_forward
- What is the expected annual return over four years for the second strategy? Information from prior: An investor is presented with the following two alternative strategies: (1) Purchase a 4-year bond with an interest rate of 8.45% and hold it until maturity, or (2) purchase a 1-year bond with an interest rate of 8.00% and when it matures, purchase another 1-year bond with an expected rate of 7.75% and when that matures, purchase another 1-year bond with an interest rate of 7.50%. The investor can purchase a fourth 1-year bond with an interest rate of 9.00%.arrow_forwardOver the next three years, the expected path of 1-year interest rates 4, 1, and 1 percent. Today if you buy $1 of one-year bond and when it matures you use the money you receive to buy another one-year bond. then your expected rate of return for this $1 investment is ____% (round to the nearest integer). If the expectations theory of the term structure is true, then it implies that the current interest rat ein 2-year bond must be ____% (round to one decimal place x.x)arrow_forwardSuppose that you buy a two-year 8% bond at its face value. a. What will be your total nominal return over the two years if inflation is 3% in the first year and 5% in the second? b. What will be your total real return?arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning
Principles of Accounting Volume 1AccountingISBN:9781947172685Author:OpenStaxPublisher:OpenStax College
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
Intermediate Financial Management (MindTap Course...
Finance
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Cengage Learning
Principles of Accounting Volume 1
Accounting
ISBN:9781947172685
Author:OpenStax
Publisher:OpenStax College
Bond Valuation - A Quick Review; Author: Pat Obi;https://www.youtube.com/watch?v=xDWTPmqcWW4;License: Standard Youtube License