question 31 and 33
31. Consider a US Treasury bond with 3 years to maturity paying a 2 percent coupon semian- nually. Suppose that the following table provides STRIP prices at the following maturity points (per 100 of FV). Compute a price for the 3-year Treasury bond based on these data? Will actual prices for this bond equal the value you determined? Explain. Maturity (months) STRIP price 6 99.80 12 99.40 18 99.00 24 98.35 30 98,00 36 97.20 32. Consider the following statement: TIPS bonds are completely free of risk, because they are not only backed by the full faith and credit of the US government, they also protect investors against any potential inflation. Is this statement true or false? Explain. 33. The table below has recent yields to maturity (YTMs) for TIPS and traditional Treasury securities from the Wall Street Journals market section (actually from around 2018): Security 1-yr maturity 5-yr maturity 10-yr maturity 30-yr maturity Treasury Sec. 1.100% 2.031% 2.521% 3.135% TIPS -0.738% -0.011% 0.527% 1.009% Assuming the TIPS YTM is a good proxy for the real interest rate and the Treasury YTM is the nominal interest rate, calculate the expected annual inflation for each time period (1 year, 5 years, 10 years, 30 years). Use the exact calculation rather than the approximation. Is inflation expected to increase or decrease ver time? 31. Consider a US Treasury bond with 3 years to maturity paying a 2 percent coupon semian- nually. Suppose that the following table provides STRIP prices at the following maturity points (per 100 of FV). Compute a price for the 3-year Treasury bond based on these data? Will actual prices for this bond equal the value you determined? Explain. Maturity (months) STRIP price 6 99.80 12 99.40 18 99.00 24 98.35 30 98,00 36 97.20 32. Consider the following statement: TIPS bonds are completely free of risk, because they are not only backed by the full faith and credit of the US government, they also protect investors against any potential inflation. Is this statement true or false? Explain. 33. The table below has recent yields to maturity (YTMs) for TIPS and traditional Treasury securities from the Wall Street Journals market section (actually from around 2018): Security 1-yr maturity 5-yr maturity 10-yr maturity 30-yr maturity Treasury Sec. 1.100% 2.031% 2.521% 3.135% TIPS -0.738% -0.011% 0.527% 1.009% Assuming the TIPS YTM is a good proxy for the real interest rate and the Treasury YTM is the nominal interest rate, calculate the expected annual inflation for each time period (1 year, 5 years, 10 years, 30 years). Use the exact calculation rather than the approximation. Is inflation expected to increase or decrease ver time
