Question 5 Use the following to answer questions (a)-(d): Suppose that all investors expect that interest...

 

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Question 5 Use the following to answer questions (a)-(d): Suppose that all investors expect that interest rates for the 4 years will be as follows: Year Forward Interest Rate 0 (today)5% 7% 9% 3 10% a) What is the price of 3-year zero coupon bond with a par value of $1,000? b) If you have just purchased a 4-year zero coupon bond, what would be the expected rate of return on your investment in the first year if the implied forward rates stay the same? (Par value of the bond = $1,000) c) What is the price of a 2-year maturity bond with a 10% coupon rate paid annually? (Par value 1 2 = $1,000) d) What is the yield to maturity of a 3-year zero coupon bond? (12 Marks) Question 5 Use the following to answer questions (a)-(d): Suppose that all investors expect that interest rates for the 4 years will be as follows: Year Forward Interest Rate 0 (today)5% 7% 9% 3 10% a) What is the price of 3-year zero coupon bond with a par value of $1,000? b) If you have just purchased a 4-year zero coupon bond, what would be the expected rate of return on your investment in the first year if the implied forward rates stay the same? (Par value of the bond = $1,000) c) What is the price of a 2-year maturity bond with a 10% coupon rate paid annually? (Par value 1 2 = $1,000) d) What is the yield to maturity of a 3-year zero coupon bond? (12 Marks)

Answer rating: 100% (QA)

a Price of 3year Zero Coupon Bond The price of a zero coupon bond can be calculated using the formula for present value P F1 rn Where P Price of the b... View the full answer