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PROBLEM 4 (16 MARKS) Assume that expectation hypothesis holds and use the following to answer questions a- d: Year 1-Year Forward Rate 1 5.8% 2 6.4% 3 7.1% 4 7.3% 5 7.4% a. (3 MARKS) What should the purchase price of a 2-year zero coupon bond be if it is purchased at the beginning of year 2 and has face value of $1,000? $877.54 b. (4 MARKS) What would the yield to maturity be on a four-year zero coupon bond purchased today? 6.648% PROBLEM 4 CONTINUED c. (5 MARKS) Calculate the price at the beginning of year 1 (today) of a 10% annual coupon bond with face value $1,000 and 5 years to maturity. $1135.32 d. (4 MARKS) What should be the holding period return of a 10% annual coupon bond with face value $1000 and five years to maturity if it is purchased at the beginning of year 1 (today) and sold at the beginning of year 2 (in one year), assuming that rates do not change. 5.8% PROBLEM 4 (16 MARKS) Assume that expectation hypothesis holds and use the following to answer questions a- d: Year 1-Year Forward Rate 1 5.8% 2 6.4% 3 7.1% 4 7.3% 5 7.4% a. (3 MARKS) What should the purchase price of a 2-year zero coupon bond be if it is purchased at the beginning of year 2 and has face value of $1,000? $877.54 b. (4 MARKS) What would the yield to maturity be on a four-year zero coupon bond purchased today? 6.648% PROBLEM 4 CONTINUED c. (5 MARKS) Calculate the price at the beginning of year 1 (today) of a 10% annual coupon bond with face value $1,000 and 5 years to maturity. $1135.32 d. (4 MARKS) What should be the holding period return of a 10% annual coupon bond with face value $1000 and five years to maturity if it is purchased at the beginning of year 1 (today) and sold at the beginning of year 2 (in one year), assuming that rates do not change. 5.8%