assume Annual coupons and compounding to answer these questions. Consider the following Information: Prices of 8%...
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assume Annual coupons and compounding to answer these questions. Consider the following Information: Prices of 8% Coupon Bonds Varying Maturities Maturity in Years 1 2 3 4 5 6 7 8 9 10 Price $ 1000.00 1000.00 992.10 984.90 971.80 959.90 949.00 939.20 930.20 922.10 Questions 1. What is the yield to maturity on the 10 year bond quoted above? 2. How much would the investor receive if the first 2 years of coupons could be stripped from this bond and sold separately. In other words, what is the PV of the first 2 years coupons? 3. What is the yield to maturity on the 3-year bond? What is the spot rate for cash received in year 3? What is the forward interest rate from year 2 to year 3? Why do these rates differ? 4. Plot the YTM term structure of interest rates (yield curve) implied by the above Table. What does this yield curve tell you about future interest rates? 5. If a 2 year spot rate contract (Strategy 1) has an interest rate of 5% per year and an alternative strategy (Strategy 2) has a one year spot rate of 6% and an implied forward interest rate of 7.5% (1.f2) what would occur (assume a well functioning market)? assume Annual coupons and compounding to answer these questions. Consider the following Information: Prices of 8% Coupon Bonds Varying Maturities Maturity in Years 1 2 3 4 5 6 7 8 9 10 Price $ 1000.00 1000.00 992.10 984.90 971.80 959.90 949.00 939.20 930.20 922.10 Questions 1. What is the yield to maturity on the 10 year bond quoted above? 2. How much would the investor receive if the first 2 years of coupons could be stripped from this bond and sold separately. In other words, what is the PV of the first 2 years coupons? 3. What is the yield to maturity on the 3-year bond? What is the spot rate for cash received in year 3? What is the forward interest rate from year 2 to year 3? Why do these rates differ? 4. Plot the YTM term structure of interest rates (yield curve) implied by the above Table. What does this yield curve tell you about future interest rates? 5. If a 2 year spot rate contract (Strategy 1) has an interest rate of 5% per year and an alternative strategy (Strategy 2) has a one year spot rate of 6% and an implied forward interest rate of 7.5% (1.f2) what would occur (assume a well functioning market)?
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Answer rating: 100% (QA)
SOLUTION 1 To calculate the yield to maturity YTM on the 10year bond we need to find the discount rate that equates the present value of the future cash flows coupons and the final maturity amount to ... View the full answer
Related Book For
Income Tax Fundamentals 2013
ISBN: 9781285586618
31st Edition
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill
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