If you follow this strategy, how much money does the firm initially borrow? How much will...

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If you follow this strategy, how much money does the firm initially borrow? How much will be available to finance the acquisition in six months? 3. Imagine that the yield curve is currently flat. The Treasury announces that they will no longer issue securities with maturities longer than two years. As a result, long-term government bonds will be refinanced using only relatively short-term debt. If the "market segmentation theory" of the yield curve is correct, what will happen to the slope of the yield curve as a result of this policy change? Explain briefly. 4. True, False, or Uncertain and Explain. According to the "liquidity preference theory of the yield curve, if the yield curve is flat, rates investors expect to be available in the future are the same as current rates. 5. Imagine that the following Treasury bonds are available: Maturity 1 3 3 Coupon Rate 0% 9.5% 0% Price $94.340 $105.403 $ 80.496 Maturity is in years, coupons are paid annually, and prices are quoted per $100 face value. (a) Construct the three-year spot yield curve. State the results as effective annual rates. (b) Use the curve in part (a) to compute the implied one-year forward rates in the yield curve, f, and 2f₁. (c) You plan to invest $1 million in a 3 year 7% coupon bond (annual coupon payments), and plan to sell it at the end of two years. At the time that you sell it, it will only have one coupon payment left. Using your calculations in parts (a) and (b), calculate the arbitrage-free holding period return (i.e., the total dollar return you will earn if future market rates equal the implied forward rates in the yield curve). 6. Calculate the requested measures for bonds A and B (assume each bond pays interest semiannually): B 9% 8% 5 A 8% Coupon Yield-to-Maturity 8% Maturity (in 2 years) Par Price (a) Price value of a basis point. (b) Macaulay duration. 100 100.000 100 104.055 If you follow this strategy, how much money does the firm initially borrow? How much will be available to finance the acquisition in six months? 3. Imagine that the yield curve is currently flat. The Treasury announces that they will no longer issue securities with maturities longer than two years. As a result, long-term government bonds will be refinanced using only relatively short-term debt. If the "market segmentation theory" of the yield curve is correct, what will happen to the slope of the yield curve as a result of this policy change? Explain briefly. 4. True, False, or Uncertain and Explain. According to the "liquidity preference theory of the yield curve, if the yield curve is flat, rates investors expect to be available in the future are the same as current rates. 5. Imagine that the following Treasury bonds are available: Maturity 1 3 3 Coupon Rate 0% 9.5% 0% Price $94.340 $105.403 $ 80.496 Maturity is in years, coupons are paid annually, and prices are quoted per $100 face value. (a) Construct the three-year spot yield curve. State the results as effective annual rates. (b) Use the curve in part (a) to compute the implied one-year forward rates in the yield curve, f, and 2f₁. (c) You plan to invest $1 million in a 3 year 7% coupon bond (annual coupon payments), and plan to sell it at the end of two years. At the time that you sell it, it will only have one coupon payment left. Using your calculations in parts (a) and (b), calculate the arbitrage-free holding period return (i.e., the total dollar return you will earn if future market rates equal the implied forward rates in the yield curve). 6. Calculate the requested measures for bonds A and B (assume each bond pays interest semiannually): B 9% 8% 5 A 8% Coupon Yield-to-Maturity 8% Maturity (in 2 years) Par Price (a) Price value of a basis point. (b) Macaulay duration. 100 100.000 100 104.055

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