Answered step by step
Verified Expert Solution
Question
1 Approved Answer
A n investor i s considering the purchase o f zero - coupon U . S . Treasury bonds. A 3 0 - year zero
investor considering the purchase zero
coupon Treasury bonds. year zero
coupon bond yielding can purchased today for
$ the end years, the owner the bond
will receive $ The yield the bond related
its price the following equation:
Here, the price the bond, the yield the
bond, and the maturity the bond measured
years. Evaluating this equation for and
gives
The investor planning purchase a bond
today and sell one year from now. The investor
interested evaluating the return the investment
the bond. Suppose, for example, that the yield
the bond one year from now Then the price
the bond one year later will
: The time remaining maturity
because one year has passed. The return for the
year
addition the yearmaturity zerocoupon
bond, the investor considering the purchase
zerocoupon bonds with maturities
years. All the bonds are currently yielding
investors describe this a flat yield
curve. The investor cannot predict the future yields
the bonds with certainty. However, the investor
believes that the yield each bond one year from
now can modeled a normal distribution with
mean and standard deviation
Questions
I. Suppose that the yields the five zerocoupon
bonds are all one year from today. What
are the returns each bond over the period?
Using a simulation with iterations, esti
mate the expected return each bond over
the year. Estimate the standard deviations
the returns.
Comment the following statement: "The
expected yield the year bond one year
from today that yield, its price would
$ The return for the year would Therefore, the aver
age return for the bond should well.
simulation isn't really necessary. Any difference
between and the answer Question must
due simulation error."
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started