QQ3 Consider the pricing of a one year zero coupon bond and the pricing of a 30 year bond with 10 annual coupons Both bonds have face values of $1,000 Suppose that the spot rate Rn that is used to discount a cash flow received in Period n is given by where Level is the level and Slope is the slope of the yield curve Currently, the level of the yield curve is 2 and the slope of the yield curve is 1 Compute the prices of the 1 year zero coupon bond and the 30 year coupon bond Suppose that the Fed increases the target rate and that this triggers an increase in the level of the yield curve of 0 3 while leaving the slope unaffected What are the prices of the bonds in this case Suppose that, in addition to an increase in the level of the yield curve by 0 3 , a rate hike by the Fed also leads to a flattening of the yield curve so that the slope falls by 0 25 What are the prices of the bond in this case

The Answer is in the image, click to view ...

Answered step by step

Verified Expert Solution

Link Copied!

Question

1 Approved Answer

Posted on Oct 06, 2024

QQ3: Consider the pricing of a one-year zero-coupon bond and the pricing of a 30-year bond with 10% annual coupons. Both bonds have face values

QQ3: Consider the pricing of a one-year zero-coupon bond and the pricing of a 30-year bond with 10% annual coupons. Both bonds have face values of $1,000. Suppose that the spot rate Rn that is used to discount a cash flow received in Period n is given by

where Level is the level and Slope is the slope of the yield curve.

Currently, the level of the yield curve is 2% and the slope of the yield curve is 1%. Compute the prices of the 1-year zero-coupon bond and the 30-year coupon bond.
Suppose that the Fed increases the target rate and that this triggers an increase in the level of the yield curve of 0.3% while leaving the slope unaffected. What are the prices of the bonds in this case?
Suppose that, in addition to an increase in the level of the yield curve by 0.3%, a rate hike by the Fed also leads to a flattening of the yield curve so that the slope falls by 0.25%. What are the prices of the bond in this case?