Finance question

I. Fixed Income Valuation. Be clear on how you are calculating your answers. Let ym,t be the log yield on a zero coupon bond that has maturity of m years at time t. Suppose the current bond yields are: yt = 3%, you = 4%, and y10= 4%. You work for a fixed income trading group that produces the following forecasts of future bond yields: E(Y1,1+9) = 4% and E(Y9,t+1) = 3.9%. a) What is the log price of 9-year and 10-year zero coupon bonds (of face value $1)? b) What is the duration of an equal-weighted portfolio (investing the same dollar amount in each) of the two bonds in part a)? c) According to the expectation hypothesis (EH), what is the expected period t+9 log yield on the 1-year bond? Is your group's forecast consistent with the EH? d) According to EH, what is the expected t+1 log yield on the 9-year bond? Is your group's forecast consistent with EH? e) Is your group's forecast consistent with the empirical evidence on the US yield curve we discussed in class? f) Your group has decided to invest in 10-year bonds for a holding period of one year. Calculate the expected log return from this strategy. Is it higher or lower than the log return from investing in 1-year bonds for a holding period of one year? What does your result imply about the trading strategy of riding the yield curve? I. Fixed Income Valuation. Be clear on how you are calculating your answers. Let ym,t be the log yield on a zero coupon bond that has maturity of m years at time t. Suppose the current bond yields are: yt = 3%, you = 4%, and y10= 4%. You work for a fixed income trading group that produces the following forecasts of future bond yields: E(Y1,1+9) = 4% and E(Y9,t+1) = 3.9%. a) What is the log price of 9-year and 10-year zero coupon bonds (of face value $1)? b) What is the duration of an equal-weighted portfolio (investing the same dollar amount in each) of the two bonds in part a)? c) According to the expectation hypothesis (EH), what is the expected period t+9 log yield on the 1-year bond? Is your group's forecast consistent with the EH? d) According to EH, what is the expected t+1 log yield on the 9-year bond? Is your group's forecast consistent with EH? e) Is your group's forecast consistent with the empirical evidence on the US yield curve we discussed in class? f) Your group has decided to invest in 10-year bonds for a holding period of one year. Calculate the expected log return from this strategy. Is it higher or lower than the log return from investing in 1-year bonds for a holding period of one year? What does your result imply about the trading strategy of riding the yield curve