Spot rates today look like this: 1-year 2% 2-year 3% 3-year 4% 4-year 6% A bond...

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Spot rates today look like this: 1-year 2% 2-year 3% 3-year 4% 4-year 6% A bond maturing in 4 years pays a 6% coupon on a $1,000 par value, with payments made annually. The price of this bond today is $1,008.34. If the expectations hypothesis were true, the expected price of this bond one year from now would be $968.51. Suppose, however, that the expectations hypothesis is not true. Instead, because most investors prefer to purchase short- term bonds rather than long-term bonds, long-term bonds have to offer a premium. That is, the expected return on a long-term bond is higher than the expected return on a sequence of short- term bonds over the same time horizon. Given this fact, the expected price of the 6% bond one year from today is: impossible to say higher than $968.51 equal to $968.51 lower than $968.51 Spot rates today look like this: 1-year 2% 2-year 3% 3-year 4% 4-year 6% A bond maturing in 4 years pays a 6% coupon on a $1,000 par value, with payments made annually. The price of this bond today is $1,008.34. If the expectations hypothesis were true, the expected price of this bond one year from now would be $968.51. Suppose, however, that the expectations hypothesis is not true. Instead, because most investors prefer to purchase short- term bonds rather than long-term bonds, long-term bonds have to offer a premium. That is, the expected return on a long-term bond is higher than the expected return on a sequence of short- term bonds over the same time horizon. Given this fact, the expected price of the 6% bond one year from today is: impossible to say higher than $968.51 equal to $968.51 lower than $968.51

Answer rating: 100% (QA)

Given that most investors prefer shortterm bonds over ... View the full answer