John observed the prices of three government bonds trading on Bond Exchange of South Africa. The...

 

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John observed the prices of three government bonds trading on Bond Exchange of South Africa. The first bond was trading at a price of R943.40 and it matures after 1-year; the second bond was trading at R841.68 and it matures after 2-years while the third bond was trading at R816.30 and it matures after 3-years. All the bonds have a face value of R1,000 and none of them pay coupons. From these prices John realised that the market consensus is that interest rates for 1-year bonds will be around 12% next year. Required 1. Under what circumstances is it a good idea for John to rely on the market consensus figure of 12% to infer future inflation and formulate bond trading strategies? [2] 2. Given the information presented in this question, describe the process or steps of getting to the market consensus figure of 12%. [4] 3. What kind of shape do you get by plotting the yield to maturities of the three bonds on a yield curve? What are the three implications of that shape to investors? [4] John observed the prices of three government bonds trading on Bond Exchange of South Africa. The first bond was trading at a price of R943.40 and it matures after 1-year; the second bond was trading at R841.68 and it matures after 2-years while the third bond was trading at R816.30 and it matures after 3-years. All the bonds have a face value of R1,000 and none of them pay coupons. From these prices John realised that the market consensus is that interest rates for 1-year bonds will be around 12% next year. Required 1. Under what circumstances is it a good idea for John to rely on the market consensus figure of 12% to infer future inflation and formulate bond trading strategies? [2] 2. Given the information presented in this question, describe the process or steps of getting to the market consensus figure of 12%. [4] 3. What kind of shape do you get by plotting the yield to maturities of the three bonds on a yield curve? What are the three implications of that shape to investors? [4]

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