Question 1 (13 marks) Answer all parts of the following question. Show your work using the...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Question 1 (13 marks) Answer all parts of the following question. Show your work using the relationships used in class. Yield(DD/MM/YYYY) The following are Canadian government bond yields. Yield 10/05/19 Yield 10/05/20 0.1 0.09 0.31 0.56 0.67 1.13 12-Month 2-Year 3-Year Yield 10/06/20 0.10 0.60 1.20 a) (2 marks) Under the Expectations Theory, calculate the expected (1-year) interest rates implied by the 10/05/20 yield curve for next year and the year after that; i.e. find i2021 and i₂022. Liquidity Premium Incorporated uses the Liquidity Premium Theory. On 10/05/20 they forecasts that (1-year) interest rates are going to be higher over the next two years at .19%; i.e. i2021 2022 = 0.19%. b) (2 marks) What risk premiums are they using? (c) (2 mark) Using the liquidity premiums you have calculated in part (b), update the nominal interest rate forecast for 2022 using the data from the next day (10/06/20). (d) (2 marks) Nowadays Germany and France in Europe are issuing 10-year bonds of negative yields. Why investors still buying them? Give two reasons. The YTM on the bond is 3% and the coupon rate is 7% with annual coupons. (e) (2 marks) What is its price if it is a 30-year bond and has a face value of 10,000? (f) (3 marks) What is the one-year Rate of Return (RET) on the bond if the yield to maturity rises to 5%? Question 1 (13 marks) Answer all parts of the following question. Show your work using the relationships used in class. Yield(DD/MM/YYYY) The following are Canadian government bond yields. Yield 10/05/19 Yield 10/05/20 0.1 0.09 0.31 0.56 0.67 1.13 12-Month 2-Year 3-Year Yield 10/06/20 0.10 0.60 1.20 a) (2 marks) Under the Expectations Theory, calculate the expected (1-year) interest rates implied by the 10/05/20 yield curve for next year and the year after that; i.e. find i2021 and i₂022. Liquidity Premium Incorporated uses the Liquidity Premium Theory. On 10/05/20 they forecasts that (1-year) interest rates are going to be higher over the next two years at .19%; i.e. i2021 2022 = 0.19%. b) (2 marks) What risk premiums are they using? (c) (2 mark) Using the liquidity premiums you have calculated in part (b), update the nominal interest rate forecast for 2022 using the data from the next day (10/06/20). (d) (2 marks) Nowadays Germany and France in Europe are issuing 10-year bonds of negative yields. Why investors still buying them? Give two reasons. The YTM on the bond is 3% and the coupon rate is 7% with annual coupons. (e) (2 marks) What is its price if it is a 30-year bond and has a face value of 10,000? (f) (3 marks) What is the one-year Rate of Return (RET) on the bond if the yield to maturity rises to 5%?
Expert Answer:
Answer rating: 100% (QA)
a Under the Expectations Theory the expected interest rate for 2021 implied by the 100520 yield curv... View the full answer
Related Book For
Fundamentals of Investment Management
ISBN: 978-0078034626
10th edition
Authors: Geoffrey Hirt, Stanley Block
Posted Date:
Students also viewed these accounting questions
-
Should an investor who thinks interest rates are going down seek low or high coupon rate bonds? Relate your answer to duration and price sensitivity.
-
As an entrepreneur, there are going to be many decisions that you need to make, such as the price to charge your customers for your goods and services. You have just graduated from college and...
-
Consider that you are going to be the HIM director for a large physician group that is just organizing the practice. They are planning to utilize fully electronic records. The electronic health...
-
Find the directive gain and directivity of the small loop antenna.
-
Suppose you are planning an experiment to test the effect of a certain drug treatment on drinking behavior in the rat. You will use a two-tailed t test to compare a treated group of rats against a...
-
Verify the commutator identities (5.1)-(5.5). [A, Av 0,2,3, (5.2) (5.3) A, B + C] = [A, B] + [A, C [A, Bc] = [A, B] C + BLA, Cl
-
For each of the following situations, calculate the degrees of freedom \((d f)\), identify the critical values (assume \(\mathrm{a}=.05\) [two-tailed]), calculate the standard error of the mean \(s\)...
-
In this chapter, you learned about the importance of testing. Design a generic test plan that describes the testing for an imaginary system.
-
Describe the difference between the primary market and the secondary market. If you were purchasing a newly-issued share of stock in technology startup company, in which market would this occur?...
-
Chaplin Arts, Inc.s comparative balance sheets for December 31, 2014 and 2013 follow. The following additional information about Chaplin Artss operations during 2013 is available: (a) Net income,...
-
JAVA PROGRAMMING, please no copy paste from other solutions. In a Sudoku game, we have to re-build a grid with 9 rows and 9 columns. Each row and each column must contain all integers from 1 to 9....
-
Within six months, a 35% rise in revenue is part of the aim. Which three important business-related topics should the company plan emphasise?
-
The effective interest rate on bonds payable reflects the effective cost of borrowing at what interest rate?
-
Which of the Contributions to a Traditional IRA or a Traditional 401(k) plan is an example of what type of income? Explain.
-
For 2022, Rebecca, age 52, has $5,972 of net self-employment income from her pet grooming business. Her self-employment tax is $844. What is the maximum amount that Rebecca may contribute to a...
-
A department submitted a request for an increase in the budget. The following justification was provided The department currently has a budget of $2,684,568. The current expenses for services are...
-
1. Make sure that you clearly identify the moral theory, theory of justice, or theory of social responsibility you use for your analysis. 4. This is formal writing. Your writing must be clear and...
-
Explain the differences and similarities between fringe benefits and salary as forms of compensation.
-
In general, if the price of the underlying stock is going up, what will happen to the price of a put option? Briefly explain.
-
What are the differences between financial and real assets?
-
Fill in the table for the type of weighting system for the various indexes. Put an (x) under the appropriate weighting system. Price Value Equal Weighted Weighted Weighted NYSE Composite Index Value...
-
Natasha Kingery is 30 years old and has a Bachelor of Science degree in computer science. She is currently employed as a Tier 2 field service representative for a telephony corporation located in...
-
This is your second interview with a prestigious brokerage firm for a job as an equity analyst. You survived the morning interviews with the department manager and the vice president of equity....
-
The following data from Lyre Ltd's accounts relates to two assets at 30 June 2023. At 30 June 2023 Lyre Ltd decides to adopt the revaluation model for both these assets. On this date land has a fair...
Study smarter with the SolutionInn App