Suppose that a 2-year zero-coupon bond with face value $1,000 currently sells at $840, while a...

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Suppose that a 2-year zero-coupon bond with face value $1,000 currently sells at $840, while a 1-year zero-coupon bond with face value $1,000 currently sells at $920. You are considering the purchase of a 2-year coupon bond that pays coupon annually. The face value of this coupon bond is $1,000 and coupon rate is 12% per year. Required: a. What is the yield to maturity of the 2-year zero-coupon bonds? (2 marks) b. What is the current price of the 2-year coupon bond? (2 marks) c. What is the forward rate of the second year? (2 marks) d. If the expectation hypothesis is accepted, what are (1) the expected price of the coupon bond at the end of the first year and (2) the expected holding period return on the coupon bond over the first year? (3 marks) e. Will the expected rate of return be higher or lower if you accept the liquidity preference hypothesis? (2 marks) Suppose that a 2-year zero-coupon bond with face value $1,000 currently sells at $840, while a 1-year zero-coupon bond with face value $1,000 currently sells at $920. You are considering the purchase of a 2-year coupon bond that pays coupon annually. The face value of this coupon bond is $1,000 and coupon rate is 12% per year. Required: a. What is the yield to maturity of the 2-year zero-coupon bonds? (2 marks) b. What is the current price of the 2-year coupon bond? (2 marks) c. What is the forward rate of the second year? (2 marks) d. If the expectation hypothesis is accepted, what are (1) the expected price of the coupon bond at the end of the first year and (2) the expected holding period return on the coupon bond over the first year? (3 marks) e. Will the expected rate of return be higher or lower if you accept the liquidity preference hypothesis? (2 marks)

Answer rating: 100% (QA)

Answer a To calculate the yield to maturity YTM of the 2year zerocoupon bonds we can use the formula YTM Face Value Price1 Number of Years 1 For the 2year zerocoupon bond Face Value 1000 Price 840 Num... View the full answer