# Question: Suppose that a one year zero coupon bond with a

Suppose that a one- year zero- coupon bond with a face value of $ 100 currently sells at $ 94.34, while a two- year zero sells at $ 84.99. You are considering the purchase of a two- year- maturity bond making annual coupon payments. The face value of the bond is $ 100, and the coupon rate is 12 percent per year.

a. What is the yield to maturity of the two- year zero? The two- year coupon bond?

b. What is the forward rate for the second year?

c. If the expectations hypothesis is accepted, what are

(i) the expected price of the coupon bond at the end of the first year and

(ii) the expected holding period return on the coupon bond over the first year?

d. Will the expected rate of return be higher or lower if you accept the liquidity preference hypothesis?

a. What is the yield to maturity of the two- year zero? The two- year coupon bond?

b. What is the forward rate for the second year?

c. If the expectations hypothesis is accepted, what are

(i) the expected price of the coupon bond at the end of the first year and

(ii) the expected holding period return on the coupon bond over the first year?

d. Will the expected rate of return be higher or lower if you accept the liquidity preference hypothesis?

**View Solution:**## Answer to relevant Questions

Continue to use the data in the preceding problem. Suppose that you want to construct a two- year-maturity forward loan commencing in three years. a. Suppose that you buy today one three- year- maturity zero- coupon bond. ...At which stage of the industry life cycle would you place each of the following industries? a. Oil well equipment b. Computer hardware c. Computer software d. Genetic engineering e. Railroads Dynamic Communication dominates a segment of the consumer electronics industry. A small competitor in that segment is Wade Goods & Co. Wade has just introduced a new product, the Carrycom, which will replace the existing ...a. Mulroney recalled from her CFA studies that the constant- growth discounted dividend model was one way to arrive at a valuation for a company’s common stock. She collected current dividend and stock price data for ...Use the spreadsheet from the Excel Applications box on spreads and straddles to answer these questions. a. Plot the payoff and profit diagrams to a straddle position with an exercise (strike) price of $ 130. Assume the ...Post your question