Question 3 (15 marks)\ Answer the following independent questions.\ a) You are evaluating the following bond instruments

A

and

B

. What is your rate of\ return on holding one bond A and one bond B for one year? (5 marks)\ b) The yield curve obtained from 3 default-free zero-coupon bonds, A, B, C, with par\ value of

$1,000

is as follows. You purchase one bond B and one bond C today.\ Assume that the pure expectations hypothesis of the term structure is correct. What is\ your rate of return on holding the bonds for two years? ( 5 marks).\ c) You purchased a 5-year corporate bond 3 year ago. Its coupon interest rate was

8%

\ with interest paid annually, and its par value was

$1,000

. The market price was

$700

\ based on the expectation that you may on average receive

70%

of the par value. The\ yield curve was perfectly flat in which the market interest rate remained the same\ as the expected YTM until now. Assume that the reinvestment can be made at the\ market interest rate. Today, due to a negative shock by a global pandemic\ accompanied by a bailout monetary policy, investors now expect to receive

30%

of\ the par value and the market interest rate for the following three years has declined by\

1%

. What is the holding period return of this bond over the past three years if you\ close the position now? (5 marks).

Answer the following independent questions. a) You are evaluating the following bond instruments A and B. What is your rate of return on holding one bond A and one bond B for one year? (5 marks) b) The yield curve obtained from 3 default-free zero-coupon bonds, A, B, C, with par value of $1,000 is as follows. You purchase one bond B and one bond C today. Assume that the pure expectations hypothesis of the term structure is correct. What is vour rate of return on holding the bonds for two vears? (5 marks). c) You purchased a 5-year corporate bond 3 year ago. Its coupon interest rate was 8% with interest paid annually, and its par value was $1,000. The market price was $700 based on the expectation that you may on average receive 70% of the par value. The yield curve was perfectly flat in which the market interest rate remained the same as the expected YTM until now. Assume that the reinvestment can be made at the market interest rate. Today, due to a negative shock by a global pandemic accompanied by a bailout monetary policy, investors now expect to receive 30% of the par value and the market interest rate for the following three years has declined by 1%. What is the holding period return of this bond over the past three years if you close the position now