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A six-month zero-coupon bond with face value $100 sells for $99.46, a one-year zerocoupon bond sells for $97.23, and an 18-month zero-coupon bond sells for
A six-month zero-coupon bond with face value $100 sells for $99.46, a one-year zerocoupon bond sells for $97.23, and an 18-month zero-coupon bond sells for $90.50. Suppose a new coupon bond, making semi-annual coupon payments, is issued today with face value $100, maturity of 18 months, and a semi-annual coupon payment of 9% (the 9% is expressed as an annual rate). (a) Calculate the price of the coupon bond today. (b) What is the implied forward rate between 12 months and 18 months? Remark: you do not need to annualize this rate. (c) If the liquidity preference theory of the yield curve is correct and there exists a liquidity premium of 0.5% per period, what is the market's expectation of the 6 -month spot rate in one year? Remark: 1 period =6 months here. Hint: see slide on expectations hypothesis in the lecture notes. (d) Are the following statements about the yield curve true or false? Explain your answers. A six-month zero-coupon bond with face value $100 sells for $99.46, a one-year zerocoupon bond sells for $97.23, and an 18-month zero-coupon bond sells for $90.50. Suppose a new coupon bond, making semi-annual coupon payments, is issued today with face value $100, maturity of 18 months, and a semi-annual coupon payment of 9% (the 9% is expressed as an annual rate). (a) Calculate the price of the coupon bond today. (b) What is the implied forward rate between 12 months and 18 months? Remark: you do not need to annualize this rate. (c) If the liquidity preference theory of the yield curve is correct and there exists a liquidity premium of 0.5% per period, what is the market's expectation of the 6 -month spot rate in one year? Remark: 1 period =6 months here. Hint: see slide on expectations hypothesis in the lecture notes. (d) Are the following statements about the yield curve true or false? Explain your answers
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