Question
a)The yields of four zero-coupon bonds of varying maturities are as follows: Maturity YTM 1 6.1% 2 6.2% 3 6.3% 4 6.4% If you expect
a)The yields of four zero-coupon bonds of varying maturities are as follows: Maturity YTM 1 6.1% 2 6.2% 3 6.3% 4 6.4% If you expect the implied term structure to be the same next year as it is this year, what is the expected return on the 2-year zero coupon bond over the coming year? Please express your answer in percent, rounded to the nearest basis point.
b)The maturities and yields of three zero-coupon bonds are as follows:
Maturity | YTM |
1 | 4% |
2 | 5% |
3 | 6% |
Next year, you expect the yields on zero-coupon bonds to be as follows:
Maturity | YTM |
1 | 5% |
2 | 6% |
3 | 7% |
c)What is your expectation of the rate of return on a 3-year zero-coupon bond over the coming year? Please express your answer in percent rounded to the nearest basis point.
d)The 1-year rate is currently 2%, and the expected 1-year rate a year from now is 1%. If the liquidity preference theory holds and the liquidity premium for the 2-year rate is 1.0%, what should the 2-year rate be? (Assume that the liquidity premium for the 1-year rate is 0.0%) Please express your answer in percent rounded to the nearest basis point.
If the 1-year rate is currently 3%, and the 2-year rate is 4.5%, what is the expected 1-year rate a year from now if the expectations hypothesis holds? Please express your answer in percent rounded to the nearest basis point.
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